The Tax Cuts and Jobs Act (the Act) which was passed at the end of 2017 made some amendments to the deductibility of business meals and entertainment expenses for tax years beginning in 2018. The Act made certain provisions clear such as a complete disallowance for deductions related to entertainment, amusement or recreation expenses. Prior to the Act, these type of expenses were subject to the 50% limitation, but now such expenses are subject to 100% disallowance. The Act also eliminated the 100% deduction for de minimus expenses such as coffee and donuts or meals provided to employees on the premises for convenience of the employer. Under the Act, these types of expenses would now only be 50% deductible unless new guidance is issued.
However, earlier IRS guidance related to the Act’s amendments were not quite as clear. For instance, it was unknown whether a business meal with a client or meals at an entertainment event would be considered entertainment and fully disallowed. To answer this question, on October 3, 2018, the IRS issued Notice 2018-76 which provides interim guidance on the deductibility of business meals and entertainment. The notice clarifies that a business meal is deductible when clients are present. In order for the expense to be 50% deductible, it must:
1. Meet the ordinary and necessary expense requirement under section 162(a)
2. Not be lavish or extravagant
3. The taxpayer or an employee of the taxpayer must be present
4. The food and beverages are provided to a current or potential business prospect or business contact
5. If the food or beverages are provided during an entertainment activity, the cost of such items must be bifurcated on the receipt/invoice and such amounts should not be inflated by the facility. This means the entertainment facility cannot unreasonably shift costs to the food and beverages to allow taxpayers a greater tax deduction.
This interim guidance has also requested comments through December 2, 2018.
If you have any questions about how this guidance relates to your situation, feel free to reach out to an SDK team member.