For many taxpayers, the statutory changes under the Tax Cuts and Jobs Act (“TCJA”) disallowing deductions for entertainment expenses were extremely unfavorable. On October 3, 2018, the Internal Revenue Service (“IRS”) released Notice 2018-76 providing guidance on the deductibility of business entertainment meals. Until Treasury and the IRS finalize regulations regarding the deductibility of business meals, you can rely on this guidance.
Pre-TCJA, you could deduct up to 50% of your business entertainment, amusement, or recreation expenses if the expenditures were directly related to the active conduct of business or if you incurred them immediately preceding, during, or following a substantial business discussion and they were associated with the entertainment. The TCJA eliminated this deduction, making all entertainment expenses nondeductible.
Although the 50% deduction for “directly related to” or “associated with” entertainment expenses was eliminated, most expenditures for business meals are still 50% deductible. Under Notice 2018-76, you may deduct 50% of business meals associated with entertainment if:
- The expense is ordinary, necessary and reasonable and not lavish or extravagant;
- You or your employee is present at the furnishing of the food and beverage;
- The food or beverage is provided to a current or potential customer, client, consultant, or similar business contact; and
- When provided during or at an entertainment activity or event, the food and beverage are purchased separately from the entertainment or costs are stated separately from the entertainment on a bill/invoice/receipt.[1]
Examples that highlight this last requirement are provided in the guidance. In one example, a sporting ticket is purchased and, while at the event, food and beverages are purchased. In this case, the game ticket is nondeductible and the food and beverages are 50% deductible. In the second example, the game ticket is for a suite in which food and beverages will be served. The cost of the food and beverage is not separately stated from the cost of the suite, making the entire amount nondeductible. The final example is a situation in which the invoice for a suite separately states the cost of food and beverages. In that case, the food and beverages are 50% deductible and the remaining cost of the suite is nondeductible.
If you are one of the taxpayers who have been assuming all entertainment meal costs are nondeductible, you should review your records, noting the costs that are separately stated on expense reports, bills or invoices. Those separately stated costs are 50% deductible, which could result in a decreased fourth quarter estimated tax payment for your business.
Guidance with respect to food and beverages provided on the business premise of the employer has not yet been released. Separate guidance will be released detailing those rules.
Cherry Bekaert’s Credit & Accounting Methods team is at the forefront of analyzing all IRS guidance and publications as they are released and can work with you directly to explain the details of these changes and how they apply to your business’s specific tax deductions. You can contact them at cam@cbh.com.
[1] Note, the IRS makes a point within this Notice to state that entertainment disallowance rules are not to be circumvented through inflating the amount of the cost of food and beverage. There is no bright line test provided; however, it is likely to be analyzed on a facts and circumstances basis and taxpayers and entertainment providers should use reasonable fair market value allocations between the cost of the entertainment and the cost of the food and beverages.
