The Tax Cuts and Jobs Act of 2017 (“TCJA”) continues to create both opportunities and challenges for the tax preparer community. As tax professionals process the TCJA in anticipation of the 2019 filing season, the focus remains on areas of confusion and ambiguity in the law. Business meal deductions are one such area still generating debate and uncertainty. Thankfully, the IRS has issued transitional guidance to help.
Prior to the TCJA taking effect, no deduction was permitted for entertainment, amusement, or recreation expenses under Internal Revenue Code (“Code”) §274. However, the Code granted exceptions to the general prohibition on deducting entertainment expenses if the expenses were related to the taxpayer’s trade or business. The corresponding deduction was limited to 50%.
In December of 2017, the TCJA was passed and it amended Code §274 to explicitly and directly deny taxpayers any deduction for entertainment expenses associated with their trade or business. The TCJA also amended the 50% deduction rule attributable to the business exception by completely removing the reference to “entertainment expenses”. Simply stated, entertainment expenses are no longer deductible under the TCJA. But questions arose as to what effect the TCJA has on business-related meals since the TCJA is not explicit on this point.
In response to this uncertainty, the IRS released Notice 2018-76 to provide transitional guidance until proposed regulations are made publicly available. In Notice 2018-76, the IRS states that the TCJA does not change the definition of “entertainment” as used in Code §274 and therefore, the regulations previously published under Code §274 continue to apply. This should help taxpayers classify expenses appropriately. And although the TCJA does not specifically address situations when the provision of business meals may constitute entertainment, legislative history helps provide clarity by indicating Congress intended to allow taxpayers to deduct 50% of food and beverage expenses associated with operating their trade or business.
Following Congressional lead, Notice 2018-76 indicates taxpayers may continue to deduct 50% of an allowable business meal if:
- The expense is ordinary and necessary under Code §162;
- The expense is not lavish or extravagant;
- The taxpayer or an employee is present when the food or beverage is provided;
- The food or beverage must be provided to a current or potential client, customer, consultant or similar contact; and
- In the case of food and beverage provided in the context of an entertainment activity, the food and beverage must be purchased separately from the entertainment, or the cost of the food and beverages must be separately stated on the receipt.
The IRS intends to provide additional guidance in the form of proposed regulations that will help taxpayers determine when meals are not deductible and when meals may be deducted at 50%. Until such time, taxpayers should follow Notice 2018-76.
Implementation and compliance with the TCJA remains a challenge. Our tax attorneys are happy to discuss questions and assist clients with tax compliance in this exciting and evolving environment.