The IRS has noted that the 2017 TCJA generally eliminated the deduction for any expenses related to activities typically considered entertainment, amusement or recreation. However, taxpayers may still deduct business expenses related to food and beverages if certain requirements are met. And that distinction has led to a lot of misunderstandings.
The IRS resolves much of the confusion with the final regulations published in September 2020, which are briefly summarized in a news release. They address the disallowance of the deduction for expenditures related to entertainment, amusement or recreation activities, including the applicability of certain exceptions to this disallowance. They also provide guidance to determine whether an activity is considered entertainment. The final regulations also address the limitation on the deduction for food and beverage expenses.
The guidance runs over 50 technical pages, but multiple examples help clarify the limits of deductibility.
In one example, taxpayer A invites B, a business associate, to a baseball game to discuss a proposed business deal. A purchases tickets for A and B to attend the game. The baseball game is entertainment as defined and thus is not deductible by A. However, A also buys hot dogs and drinks from a concession stand. Since the food is purchased separately from the game tickets, it is not an entertainment expenditure and is not subject to the disallowance. Therefore, A generally may deduct 50% of the food expenses.
Now switch the scenario described above to a stadium luxury box where food is provided as part of the ticket cost. 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 is an entertainment expenditure. The purchaser may not deduct the cost of the tickets or the food and beverages associated with the game tickets.
However, if the venue breaks out the cost of the food and beverages and states this cost separately on the invoice, and if this cost reflects the venue’s usual selling price for the food and beverages if purchased separately, the food and beverage cost is not an entertainment expenditure and thus may be deducted at the 50% rate.
These examples illustrate just a couple of the issues addressed in the final regulations, and there are more topics with their own examples. Business owners should consult tax professionals to make sure they are not inadvertently violating any rules — or leaving money on the table.