The Tax Cuts and Jobs Act (TCJA) enacted in late 2017 included a provision repealing any deduction for business entertainment costs beginning in 2018. Previously, 50% of those costs had been deductible provided that they were “directly related” to the active conduct of trade or business, or directly preceded or followed a “substantial and bona fide business discussion.” Business meals were also 50% deductible provided they met a number of substantiation requirements and were not “lavish or extravagant.” Consequently, prior to the TCJA both business entertainment and meals were 50% deductible and there was no reason to separate the meals from the entertainment.
Following enactment of the TCJA, questions arose as to whether business meals should themselves be considered “entertainment,” and if not, whether those meals that were directly associated with entertainment should also be nondeductible.
The new IRS Notice resolves those issues favorably for taxpayers. It clarifies that business meals are not in and of themselves considered entertainment. It also says that such meals provided during or at an entertainment activity remain 50% deductible if “the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.” It goes on to caution against attempts to circumvent the loss of the entertainment deduction by inflating the costs of associated foods or beverages.
The Notice provides examples permitting deductions for food and drinks purchased separately at a baseball game, and food and drinks that are separately stated on an invoice for tickets for a suite at a basketball game where food and drinks are provided in the suite.
Although the Notice is welcome news for business taxpayers, it will also require additional work to substantiate the separate payment of meal expenses whenever there is any associated entertainment.
The IRS also said it intends to issue proposed regulations incorporating the guidance in the Notice, and requested comments by 2 December 2018. Until those regulations are finalized, taxpayers may rely on the Notice.
Worldwide ERC® members whose employees entertain clients will now have clarity that any food and beverages provided during those activities will be 50% deductible, but also face the task of separating those costs from the associated entertainment. This may be very difficult to do for activities that were conducted earlier in 2018.