In Notice 2018-76 (the “Notice”), the Internal Revenue Service (the “IRS”) provides transitional guidance on the deductibility of expenses for certain business meals under § 274 of the Internal Revenue Code (the “Code”).
Section 274 was amended by the Tax Cuts and Jobs Act (2017) (the “Act”). As so amended, § 274(a)(1) generally disallows a deduction for expenses with respect to entertainment, amusement, or recreation. However, the Act does not specifically address the deductibility of expenses for business meals. This deductibility could be lost to the extent the business meals constitute entertainment expenses. The Notice provides guidance on this topic, on which taxpayers may rely for now, and announces that the IRS and Treasury intend to publish regulations to provide permanent guidance.
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, in accordance with pre-Act law.
Therefore, under the Notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- 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. The Notice illustrates the guidance with examples.