Final regulations clarify entertainment and meal deductions

IRS clarifies what can be expensed under current tax law.

By Davinia Lyon

The IRS issued final regs implementing significant changes in the Tax Cuts and Jobs Act (TCJA) regarding deductions for travel and entertainment expenses (Sec. 274). The release finalizes proposed TCJA provisions that:

• Repeal the tax deduction for entertainment “directly related to a trade or business”
• Repeal the business-discussion exceptions to the general disallowance of entertainment expense deductions
• Repeal special substantiation rules for entertainment expenses

The regulations confirm that “entertainment” does not include food or beverages unless provided at or during an entertainment activity, and their costs are included in entertainment costs. In addition, the rules confirm that deductions related to dues and fees for social, athletic, or sporting club or organizations are not allowed.

For food and beverage expenses, taxpayers can deduct 50% of business meal expenses if:

• The expense is ordinary and necessary;
• The expense is not lavish or extravagant and the taxpayer or an employee is present;
• The food or beverage is provided to a current or potential business customer, client, consultant, or similar business contact; and,
• Food and beverages provided during or at an entertainment activity purchased separately from the entertainment or their cost is separately stated.

The term “business associate” is expanded to include employees. Employer-provided meals to employees and non-employees is deductible up to 50% of the business meal expense. Food and beverage expenses must include actual cost, including delivery fees, tips, and sales tax; indirect expenses such as transportation to the food and expenses related to operating a facility are not included in the actual cost.

The takeaway

The applicability of these changes is quite broad and covers all business taxpayers and persons, especially business owners. Taxpayers can deduct 100% of business meal expenses in the following situations, as provided by the IRS:

• Consumed by food service workers while working in a restaurant or catering business
• Provided by a real estate agent at an open house
• Provided by seasonal camp to camp counselors
• Provided at company holiday parties and picnics

Taxpayers can deduct 50% of business meal expenses in the following situations, as provided by the IRS:

• Available to employees in a pantry, break room or copy room
• Provided to employees at a company cafeteria
• Provided to attendees at a business meeting

While these may not represent big tax savings ideas for business taxpayers, the final rules do clarify what can be expensed under current tax law. Contact us with your questions on properly classifying expenses to capture full tax savings.

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