IRS guidance allows taxpayers to deduct 50% of the cost of food and beverages provided at entertainment events. The cost of the entertainment and the meals must be purchased separately or recorded separately.

The Tax Cuts and Jobs Act ( P.L. 115-97) eliminated business deductions for expenses related to entertainment, amusement, and recreation activities, however no change was made to the rule allowing a 50% deduction for business meal expenses. Some uncertainty still exists regarding the treatment of meal expenses provided in connection with entertainment under the new law. The changes made by the Tax Cuts Act are effective for amounts paid or incurred after 2017.

Tests for Deductible Meal Expenses
The new legislation does not affect the general rule that 50% of food and beverage expenses associated with operating a trade or business are deductible. Under the guidance, 50% of food and beverage expenses associated with operating a trade or business continue to be deductible after 2017 if they meet the following requirements:

  • The expense must be ordinary and necessary and paid in carrying on a trade or business;
  • The expense may not be lavish or extravagant;
  • The taxpayer or an employee must be present when the food or beverages are furnished; and
  • Food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact.

In addition, if the food is provided during or at an entertainment activity, the separate invoice requirement applies.

Example: A taxpayer invites a business contact to a basketball game. The cost of the tickets is a nondeductible entertainment expense. However, 50% of the cost of hot dogs and beverages purchased separately are deductible as meal expenses. If the cost of the tickets includes meals and beverages and the tickets do not separately state the value of the meal and beverages, the entire cost of the tickets is a nondeductible entertainment expense. If the invoice for the game tickets separately states the cost of the food and beverages, 50% of the separately stated cost is a deductible meal expense.

Proposed Regulations Expected
The IRS intends to publish proposed regulations that clarify when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible. Taxpayers may rely on the guidance in this notice until then.The following areas are of particular concern:

  • If further guidance is needed to clarify the treatment of entertainment and business meal expenses;
  • If the definition of entertainment in the current regulations should be retained or revised;
  • If the objective test in the current regulations for determining if an activity constitutes entertainment should be retained or revised; and
  • If additional examples should be added to the proposals.

If you have questions about the meals and entertainment expense guidance, contact an MCB Advisor at 703-218-3600 or click here. To review our tax news articles, click here. To learn more about MCB’s tax practice and our tax experts, click here.

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