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Welcomed guidance has been issued by the IRS that confirms businesses can generally continue to deduct 50 percent of the cost of business meals, including those incurred while meeting with or entertaining customers and clients. However, pursuant to changes made by tax reform, the cost of the entertainment itself can no longer be deducted for 2018 and beyond even when business discussions are conducted.
Background and Discussion
With the disallowance of the deduction for client entertainment that was included in tax reform last year, it was not clear if all meals with customers, clients and vendors would be considered “entertainment.” Treatment as “entertainment” would drop the tax deduction from 50 percent to zero under the new law.
Notice 2018-76 provides interim guidance under Section 274 of the Internal Revenue Code clarifying that while tax reform amended Section 274 to generally disallow expenses for entertainment, amusement, or recreation, it did not change the 50 percent deductibility of business meals. The IRS intends to publish proposed regulations under Section 274 clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50-percent deductible expenses. Until the proposed regulations are effective, taxpayers may deduct, under the guidance provided in Notice 2018-76, an otherwise allowable business meal expense if:
The notice provides several examples of how the guidance will be applied. In one such example, a taxpayer who attends a baseball game with a business contact may deduct 50 percent of the cost of hot dogs and drinks purchased at the baseball game. The cost of the tickets to the game itself, an entertainment event, is nondeductible. In another, a taxpayer purchases tickets to attend a professional sporting event in a suite with a business contact at which food and beverages are available. The taxpayer would treat the food and beverages as nondeductible if they are included in the cost of the suite ticket, but would be able to deduct 50 percent of the cost of the food and beverages if it was separately stated from the cost of the event tickets on the suite invoice.
Taxpayers may rely on the interim guidance while the Treasury Department and IRS draft proposed regulations under Section 274.
Notice 2018-76 is a relief to many companies that were concerned that the Tax Cuts and Jobs Act amendments to Section 274 to disallow expenses for entertainment, amusement or recreation might have applied to all situations where the business paid for a customer’s meal. Pursuant to the changes and the guidance:
In light of the new guidance, taxpayers should review their payments classified as nondeductible entertainment and change supportable food and beverage charges to 50-percent deductible. The procedures for tracking and documenting entertainment, food and beverages should be revisited in order to distinguish between 100 percent, 50 percent, and non-deductible amounts. Taxpayers should also request that vendors separately state the charge for food and beverages to ensure that they are eligible for the business meal deduction.
Please contact your Marvin and Company, P.C. representative for additional information.