IRS Guidance on Meals and Entertainment Deduction

| 10/11/2018
Recent guidance from the IRS indicates that business meals will continue to be 50 percent deductible following tax reform. Prior to Notice 2018-76, there was concern that no deduction would be allowed for business meals.

Meal expenses

Businesses are allowed a 50 percent deduction for amounts paid for meals associated with the active conduct of the taxpayer’s trade or business. The Tax Cuts and Jobs Act (TCJA) removed the definition for “business meal” from the law. Because of this, there was some question about whether business meals would remain 50 percent deductible or if the entire deduction would be lost. Notice 2018-76 indicates that the IRS will publish regulations that answer two of the most common questions regarding business meals and provides the following interim guidance:
  • Meals with clients, customers, or prospects with business discussions will continue to be 50 percent deductible as business meals.
  • Taxpayers will be allowed a 50 percent deduction for meals purchased at an otherwise nondeductible entertainment event, such as a sporting event, as long as the meals are separately stated on any invoice or receipt.
Based on the recent guidance, the following is a reasonable understanding of the deductibility allowance of business meals:
table

Items to consider

Businesses should keep in mind a few things when reviewing their 2018 meals and entertainment policies. Because the effective date of the law change is based on expenses incurred after Dec. 31, 2017, the new rules apply now without regard to the company’s year-end. Businesses also should consider the impact of the new law on sponsorship arrangements, charitable events, and similar activities. Sponsorship arrangements often include suites or game tickets in addition to advertising benefits. Under the TCJA, the portion of a sponsorship agreement allocable to suites or game tickets will be nondeductible instead of 50 percent deductible, and any meal expense not separately stated also will be nondeductible. The remainder of the sponsorship agreement will continue to be deductible as an advertising expense.
 
Finally, the cost of charitable sporting events (such as a charity golf outing) typically involves two components: the cost of the event and meals and the charitable contribution for amounts paid in excess of that amount. Before tax reform, the cost allocable to an event and meals was fully deductible. Beginning in 2018, the cost of the event is not deductible, although the meals might be 50 percent deductible depending on facts and circumstances. The charitable contribution will continue to be deductible.
 

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Howard Wagner
Partner, National Tax Services