On October 5, 2018, the IRS issued Notice 2018-76 (Notice), which provides interim guidance on the deduction for business meals following the Tax Cuts and Jobs Act’s (TCJA) repeal of the entertainment expense deduction. The Notice additionally states Treasury’s intent to issue regulations distinguishing business meals from entertainment but notes that taxpayers may rely on the Notice pending finalization of those regulations.
Some Questions Answered
The TCJA’s elimination of the entertainment expense raised many questions about the continued deductibility of business meals. The Notice answers some of those questions, concluding that under certain circumstances, business meals remain deductible (subject to the 50% limitation). Those circumstances echo current law. The issue of deductibility is most uncertain, however, with respect to food and beverages provided in the context of an entertainment-related activity, such as a sporting event. The Notice provides the circumstances under which these expenses will remain deductible (subject to the 50% limitation).
The Notice identifies Five Criteria for deducting business meals, most of which are features of current law:
1. The expense is an ordinary and necessary expense under section 162 paid or incurred during the taxable year in the conduct of a trade or business;
2. The expense is not lavish or extravagant under the circumstances;
3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food and beverages;
4. The food and beverages are provided to a current or potential customer, client, consultant or similar business contact; and
5. Where they are provided at or during an entertainment activity, the food and beverages are purchased separately from the entertainment or the cost is stated separately from the entertainment cost on the invoices, bills, or receipts.
The Notice provides several examples:
Example 1: The Taxpayer takes a business contact to a baseball game, an entertainment activity, and buys hot dogs and drinks at the game. The Notice concludes that the cost of the game tickets is a non-deductible entertainment expense, but that the food and beverages, since purchased separately from the tickets, are deductible (subject to the 50% limitation).
Examples 2 and 3: The Taxpayer takes a business contact to a basketball game, also an entertainment activity. Where the food and beverage cost was included in the cost of the tickets, the entire amount was disallowed as entertainment expense. Where, however, the invoice separately stated the food and beverage costs, those costs were deductible (subject to the 50% limitation).
Substantiation and Invoicing
Under the Notice, substantiation and invoicing are critical to the deductibility of business meals offered in the context of entertainment activities. Under prior law, both entertainment expenses and business meals were 50% deductible, so there was no need to separately state food and beverages on the invoice. Under the Notice, and presumably proposed regulations to be issued, this substantiation will be paramount.
In the near future, we will prepare a more in-depth alert covering meals and entertainment deductions following the TCJA.
Berdon LLP New York Accountants