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What Happened to Entertainment Deductions?


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The Tax Cuts and Jobs Act had a number of provisions that affect taxation. But one of the nagging issues arose due to the elimination of the deduction for entertainment activities by changes made to IRC §274.

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The Tax Cuts and Jobs Act had a number of provisions that affect taxation.  But one of the nagging issues arose due to the elimination of the deduction for entertainment activities by changes made to IRC §274.  The changes left many wondering about the status of business meals with customers, suppliers and others with a relationship with the business--were these gone entirely?

The committee report indicated that Congress intended at least some business meals to be deductible, but many were concerned the law itself seemed to stand in the way of a deduction for many such meals.

Although it took a while, the IRS did eventually come out with guidance that most business taxpayers will welcome.

The IRS announced in Notice 2018-76 transitional guidance on the treatment of business meals following the revisions made to IRC §274 by the Tax Cuts and Jobs Act.

The Notice does indicate that the IRS will be issuing separate guidance in the following area:

The Treasury Department and the IRS intend to issue separate guidance addressing the treatment under § 274(e)(1) and 274(n) of expenses for food and beverages furnished primarily to employees on the employer’s business premises.

The notice points out the issues that many spotted with the revisions made to the law as compared to guidance found in the House committee and conference reports:

The Act did not change the definition of entertainment under § 274(a)(1); therefore, the regulations under § 274(a)(1) that define entertainment continue to apply. The Act did not address the circumstances in which the provision of food and beverages might constitute entertainment. However, the legislative history of the Act clarifies that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business. See H.R. Rep. No. 115- 466, at 407 (2017) (Conf. Rep.).

The IRS has issued this notice to deal with this issue temporarily.  As the Notice states: 

The Treasury Department and the IRS intend to publish proposed regulations under § 274 clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance in this notice for the treatment under § 274 of expenses for certain business meals.

The Notice provides for a five-factor test to determine if meals are a 50 percent business expense.  To be considered a 50 percent item (rather than entertainment that is nondeductible) the meal expense must meet all five of the following tests:

  • The expense is an ordinary and necessary expense under § 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 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.

In the Notice, the IRS provides three examples.  In all examples, it is assumed the meal is otherwise an ordinary and necessary expense under the standard tests for business expenses under IRC §162(a) and are not lavish or extravagant.

The examples are reproduced below:

Example 1, Notice 2018-76

(i) Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B

(ii) The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. 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 § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2, Notice 2018-76

(i) Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

(ii) The basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the § 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3, Notice 2018-76

(i) Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

(ii) As in Example 2, the basketball game is entertainment as defined in § 1.274- 2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

The IRS does provide a reminder in the Notice that, in addition to meals allowed as a deduction under the Notice, other meals are specifically protected from treatment as nondeductible entertainment by the statutory exceptions found in IRC §274(e).

Section 274(e) enumerates nine specific exceptions to § 274(a). Expenses that are within one of the exceptions in § 274(e), which may include certain meal expenses, are not disallowed under § 274(a). However, those expenses may be subject to the 50 percent limit on deductibility under § 274(n).

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