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IRS Proposes New Rules on Meals and Entertainment Deductions (5 Minute Read)

On February 21, 2020, the IRS released proposed regulations to address the ability of businesses to take deductions for meal and entertainment expenses affected by the  Tax Cuts and Jobs Act of 2017 (TCJA). TCJA essentially eliminated the ability to deduct entertainment expenses while preserving the ability to deduct 50 percent of the costs of business meals.

The proposed regs primarily provide clarification on what constitutes entertainment and when business meals are deductible. These proposed regs generally follow Notice 2018-76 (PDF), issued on October 15, 2018, which provided transitional guidance on the deductibility of expenses for certain business meals. Under that notice, taxpayers may take the deduction if:

  1. The expense is an ordinary and necessary expense under section 162(a) paid or incurred during the taxable year in carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. 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 from the cost of the entertainment on one or more bills, invoices, or receipts.

In adopting these requirements, the proposed regs clarify that food provided at an entertainment activity, such as a ballgame or a concert, must be separately itemized and consistent with the venue’s usual selling costs for those items in order for the expenses to be deductible.

The proposed regs also define “business associate” as any “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.”

Employers providing snacks, such as free coffee, soda, bottled water, donuts, and chips, to its employees in break-rooms or on-site meals for the employer’s convenience were also impacted by TCJA. Previously, employers could deduct the entire cost of providing such perks. Now, employers may only deduct 50 percent of these benefits. The proposed regulations clarify that the exception to the deduction disallowance for entertainment expenses incurred for providing recreation primarily for the benefit of employees does not apply to free food and beverages provided in a break room because “the mere provision or availability of food or beverages is not a recreational, social, or similar activity.”

Taxpayers affected by this change and other interested parties may submit comments on the proposed regulations. The IRS will hold a public hearing on these proposed regulations on April 7, 2020.