October 15, 2020 - Tax Group News: IRS Updates Guidance on Business Meal and Entertainment Deductions
By: Marc T. Finer
The 2017 Tax Cuts and Jobs Act (the “TCJA”) eliminated the 50% deduction for any expenses related to business entertainment, amusement or recreation activities. Taxpayers may, however, still deduct business expenses related to food and beverages if certain requirements are met. On September 30, 2020, the IRS issued final regulations that implement the 2017 legislation and largely follow, with some clarifications, the proposed regulations issued in February 2020 and the guidance in Notice 2018-76, as revised in the proposed regulations.
The following are some of the highlights of the final regulations:
Qualifying Business Meal Expenses
The final regulations confirm that the business meal expense must not be lavish or extravagant under the circumstances and the taxpayer, or an employee of the taxpayer, must be present at the furnishing of the food or beverages.
The final regulations confirm that the food or beverages must be provided to a “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
The final regulations make it clear that the final regulations are intended to provide comprehensive rules for food and beverage expenses and thus also apply to travel meals.
The exception to the 50 percent limitation on expenses for food and beverages made available to the general public also applies to expenses for food and beverages provided to employees only if the employer reasonably expects more than 50 percent of the refreshments will be consumed by customers, clients and visitors.
The definition of “food and beverage expenses” includes any delivery fees, tips and sales tax but does not include the cost of transportation to the meal.
To assist taxpayers in applying the above rules, the final regulations also provide a number of examples to address specific factual scenarios including:
The final regulations provide helpful guidance and clarifications to help taxpayers determine whether an activity should be considered a nondeductible entertainment, amusement or recreation activity or a deductible business meal expense following the TCJA complete elimination of any deduction for the costs associated with these activities. While the cost of a standalone business meal (e.g., client dinner) continues to be 50% deductible, taxpayers that provide business meals in connection with entertainment activities should require that the meal cost be separately stated from the entertainment cost on any invoice. Businesses that have not already done so based on the proposed regulations and Notice 2018-76 should also review their documentation regarding previously incurred business meal and entertainment expenses to make sure the documentation can support a division of these expenses. If not, it may be possible to obtain revised documentation from the vendor that does separately identify the cost of the business meal and entertainment expenses. Substantiation and invoicing of a separate cost for business meals provided in the context of entertainment activities will be critical to ensuring that the meal costs remain partially deductible. Failure to do so is a trap for the unwary.
The final regulations are effective on October 9, 2020.
If you have any questions regarding how deductibility of business meal expenses following the enactment of the TCJA and the final regulations might affect your business and/or create potential tax planning opportunities, please contact Marc T. Finer, Tax Partner, at 860-240-6096 or firstname.lastname@example.org.
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