IRS Issues New Guidance on the Deductibility of Business Meals

UPDATE: PLEASE NOTE THAT THE IRS ISSUED CHANGES TO THIS RULING. PLEASE SEE THE NEW ARTICLE DATED OCTOBER 2, 2020 FOR DETAILS ON THE UPDATES.

When the Tax Cuts and Jobs Act (TCJA) was issued, we noted that there were several areas of the new law that needed clarification. One of those addressed the deductibility of expenses for meals and entertainment. While the TCJA clearly denied deductions for entertainment, the treatment of the cost of meals associated with entertainment was not as well defined.

Now the IRS has issued Notice 2018-76 (The Notice) indicating that taxpayers will be allowed to deduct half the cost of meals, but only if they meet the following requirements:

1. The expense is an ordinary and necessary expense under §162(a) that is paid or incurred during the taxable year in carrying on any trade or business;
2. The expense is not lavish or extravagant for the circumstances;
3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are purchased;
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
5. 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 bill, invoice, or receipt. The entertainment disallowance rule may not be circumvented by inflating the amount charged for food and beverages.

The Notice provides the following three examples regarding meals associated with entertainment:

Example 1. 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. The baseball game is entertainment, and the cost of the game tickets is a nondeductible entertainment expense. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2. 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. The basketball game is entertainment, and the cost of the game tickets is a nondeductible entertainment expense. 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 nondeductible entertainment expense. Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3. 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. As in Example 2, the basketball game is entertainment, and the cost of the game tickets, other than the cost of the food and beverages, is nondeductible. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.

As with most broad legislation, sections of the new tax law can be confusing. What’s clear is that your returns for 2018 will have to comply with all provisions of the law as interpreted by the IRS. If you have questions or concerns about the new law and how it might affect you, please contact your HBK tax advisor.