Meal and Entertainment Expense Deductions Proposed Regulations

| 2/27/2020
Meal and Entertainment Expense Deductions Proposed Regulations

On Feb. 26, the U.S. Department of the Treasury and the IRS published proposed regulations on the changes to deductions for meal and entertainment expenses under IRC Section 274 enacted by tax reform.

Changes to meal and entertainment expense deductions

Prior to tax reform, a 50% deduction disallowance generally applied to entertainment, amusement, or recreation (collectively, “entertainment”) and business meal expenses. After tax reform, deductions for entertainment expense amounts paid or incurred after Dec. 31, 2017, generally are entirely disallowed.

The change generally did not affect business meals, other than expenses for food or beverages provided through an employer-operated eating facility meeting the requirements for de minimis fringes or provided for the convenience of the employer. Prior to tax reform, such expenses were fully deductible. After tax reform, such expenses for amounts paid or incurred after Dec. 31, 2017, generally are 50% deductible, and for amounts paid or incurred after Dec. 31, 2025, no longer will be deductible.

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Notice 2018-76

In Notice 2018-76, Treasury and the IRS provided interim guidance on how to treat client business meal expenses on which taxpayers could rely until the issuance of proposed regulations. The notice limits its guidance to client business meals. It provides that such meal expenses remain subject to the 50% deduction allowed under prior law if all of the following apply:

  • The expenses are ordinary and necessary under IRC Section 162 in carrying on any trade or business.
  • The expenses are not lavish or extravagant under the circumstances.
  • The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages.
  • The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact.
  • If the food and beverages are provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on relevant bills, invoices, or receipts and cannot be inflated to circumvent the entertainment disallowance.

Proposed regulations

The recently proposed regulations provide that taxpayers may rely on the guidance within the regulations until finalized, with respect to entertainment and food or beverage expenses paid or incurred after Dec. 31, 2017. In addition, taxpayers may continue to rely on the guidance in Notice 2018-76.

The proposed regulations largely follow, but also add to, the notice’s guidance on client business meals and include new guidance on employer-provided food and beverages (business meals, travel meals, and other food or beverages), including whether prior law exceptions to deduction disallowances apply for such expenses.

The proposed regulations’ guidance includes the following:

  • With respect to client business meals, the term “entertainment” does not include food or beverages unless such items are provided at or during an entertainment activity and the costs of the food or beverages are not separately stated from the entertainment costs.
  • Beyond client business meals, the guidance in Notice 2018-76 applies to all food or beverages (including travel meals and employer-provided meals) provided at or during an entertainment activity. The proposed rules clarify the rules on separately stating food and beverage costs from entertainment costs and clarify that the entertainment disallowance rule applies regardless of whether the activity is related to or associated with the active conduct of the taxpayer’s trade or business.
  • Food and beverage expenses are not deductible unless provided to a “business associate” as defined in prior regulations with modification. Other definitions are provided, including “food and beverage expenses.”
  • Section 274(d) substantiation requirements continue to apply to travel meals to deduct 50% of such expenses, and prior law limitations under IRC Section 274(m)(3) continue to apply to deductions for food or beverage travel expenses of spouses, dependents, or other individuals accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel.
  • The deduction limitation rules generally apply to all food and beverages, whether characterized as meals, snacks, or other food or beverage items and regardless of whether the food or beverages are de minimis fringes.
  • Additionally, the proposed regulations address how the various prior law exceptions from deduction limitations may apply. These exceptions include expenses treated as compensation, expenses includible in income of persons who are not employees, reimbursed food or beverage expenses, recreational expenses for employees, items available to the public, and goods or services sold to the public. Specific requirements attach to each of these exceptions under prior law, and the proposed regulations add guidance regarding their potential application to various food or beverage expenses after tax reform.

Looking ahead

The proposed regulations affect 2019 tax provisions as well as those in the future. As such, now is a good time to begin considering whether 2019 meal and entertainment expenses are properly deducted. The proposed regulations demonstrate that the deductibility of each expense type depends on the applicable facts and whether one of the exceptions to the deduction disallowance can apply. These expenses include employer-provided business meals, meals during employee travel, de minimis meals and snacks provided on an employer’s premises, entertainment expenses generally, and client meals and entertainment. The IRS continues to frequently audit deductions for meals and entertainment.

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Tim Daum
Managing Director, Washington National Tax