Authored by Tim Kramer
On Oct. 3, 2018, the Internal Revenue Service (IRS) released Notice 2018-76. This notice provides transitional guidance on the deductibility of expenses for certain business meals under section 274 as amended by the Tax Cuts and Jobs Act (TCJA). This notice also announces the intent of the U.S. Treasury Department and IRS to publish proposed regulations under section 274. The guidance described in Notice 2018-76 is applicable as of Jan. 1, 2018, and may be relied on until the proposed regulations are effective.
Prior to the TCJA, section 274 generally allowed taxpayers to take a deduction equal to 50 percent of the cost of meals and entertainment if the expenses were directly related to the active conduct of the taxpayer’s trade or business, or either directly preceded or followed a business discussion associated with the taxpayer’s active trade or business. The enactment of the TCJA on Dec. 22, 2017, brought about some changes and uncertainty specifically relating to the deductibility of certain meals and entertainment expenses.
Under section 274(a) as amended by the TCJA, no deductions are allowed for costs related to an activity generally considered to constitute entertainment, amusement or recreation, or with respect to a facility used in connection with these activities. Section 274(e) lists nine specific exceptions to section 274(a) that would allow the taxpayer to take a deduction for these expenses. These exceptions would include certain meal expenses that would be subject to the 50 percent limit on deductibility.
This notice also provides transitional guidance relating to the deductibility of certain business meals. Taxpayers may deduct 50 percent of an otherwise allowable business meal expense as long as the expense meets the following qualifications:
- is ordinary and necessary in carrying out any trade or business;
- is not lavish or extravagant;
- the taxpayer or an employee is present at the event;
- the food and beverages are provided to a current or potential business customer, client, consultant, etc.;
- and in the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately.
This notice includes several examples that clarify the tax treatment of entertainment expenses when meals are included in the cost. For example, if a taxpayer invites a client to a sporting event, the cost of the tickets is generally nondeductible whereas 50 percent of the cost of any food or beverages purchased separately at the event would be deductible. However, if the cost of the tickets included food and beverages (e.g., in a suite), the expense related to the food and beverages would only be deductible, subject to the 50 percent limit, if the cost of the food and beverages is separately stated on the invoice.
What this means for taxpayers
Notice 2018-76 indicates that the IRS and Treasury Department intend to issue proposed regulations that will clarify when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible business meal expenses. Taxpayers should review their meals and entertainment expenses with their tax advisors to determine the tax treatment under this transitional guidance until the proposed regulations are issued.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.