Issue: Rick, a salesman, invited Bob, a business contact, to a baseball game. Rick purchased tickets for them to attend the game. While at the game, Rick bought hot dogs and drinks for both himself and Bob. Under the Tax Cuts and Jobs Act of 2017 (TCJA), which amended the rules regarding deductions for entertainment expenses, can Rick deduct the game tickets, hot dogs, or drinks?
Answer: Based on examples provided in IRS Notice 2018-76, the baseball game is entertainment as defined in IRS Reg. Sec. 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by Rick.
The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the Internal Revenue Code Sec. 274(a)(1) disallowance. Therefore, Rick may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
Guidance after new law. The TCJA amended Internal Revenue Code Sec. 274 to generally disallow a deduction for expenses with respect to entertainment, amusement, and recreation. However, the TCJA does not specifically address the deductibility of expenses for business meals. In Notice 2018-76, the IRS announced its intention to publish proposed regulations that will include guidance on the deductibility of expenses for certain business meals. Until the proposed regulations become effective, taxpayers may rely on the guidance in Notice 2018-76 for the treatment of certain business meals.
Meal expenses. Under Sec. 274(k), a deduction is not allowed for food or beverages unless: (1) the expense is not lavish or extravagant under the circumstances; and (2) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages. Under Sec. 274(n)(1), the amount that can be deducted for any such expense for food or beverages cannot exceed 50 percent of the expense that otherwise would be allowable.
Entertainment expenses. Under law prior to the enactment of the TCJA, taxpayers could deduct 50 percent of meal expenses and could also deduct 50 percent of entertainment expenses that were directly related to the active conduct of the taxpayer’s trade or business, or preceded or followed a substantial and bona fide business discussion associated with the active conduct of the taxpayer’s trade or business. The TCJA repealed the 50-percent deduction for entertainment expenses, so entertainment expenses are no longer deductible at all.
Clarification of 50-percent limitation. The IRS has clarified that otherwise allowable meal expenses remain deductible, subject to the 50-percent limitation in Sec. 274(n)(1) and guidance under Notice 2018-76. According to the IRS, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
The expense is an ordinary and necessary expense under Internal Revenue Code Sec. 162(a) paid or incurred during the taxable year in carrying on any trade or business;
The expense is not lavish or extravagant under the circumstances;
The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
In the case of food and beverages provided during dining 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Source: IRS Notice 2018-76, Expenses for Business Meals Under § 274 of the Internal Revenue Code, I.R.B 2018-42, October 15, 2018; https://www.irs.gov/pub/irs-drop/n-18-76.pdf.