American as Baseball Games and Apple Pie – the Business Meal Deduction

If there is one negative aspect of the 2017 Tax Cuts and Jobs Act (TCJA) that taxpayers have had trouble stomaching more than the reduction in the state and local tax deduction, it might be the loss of some types of deductions for meals and entertainment (see our articles of February 12, 2018 and January 15, 2018). Like a plate of bad food, the TCJA threw away the deduction for any expenses related to activities generally considered entertainment, amusement, or recreation.  It also limited the deduction for expenses related to food and beverages provided by employers to their employees. Unclear at that time was how food and beverages closely associated with entertainment would be treated, but taxpayers now have guidance that is more definitive. 

On February 24, the IRS issued proposed regulations addressing both meals and entertainment incurred after December 31, 2017.  Proposed regulation §1.274-11 addresses the elimination of the deduction for entertainment-related activities, while proposed regulation §1.274-12 address the limitation on the deduction for food and beverages. 

The entertainment regulation provides guidance defining what is and what is not entertainment.  For instance, attendance at a theatrical performance by a professional theatre critic would not be considered entertainment if he or she is attending in a professional capacity.  The regulation also provides that food or beverages separately purchased and invoiced from entertainment are not considered entertainment and, therefore, can still be deductible. 

Although the TCJA did not specifically amend the rules for travel expenses, the proposed regulations do provide comprehensive rules for all food and beverage expenses.  Therefore, according to the IRS and U.S. Treasury, the regulations also apply the general rules for meal expenses from Notice 2018-76, as revised in these proposed regulations, to travel meals.

The regulations also address limitations on meal and beverage expenses in other circumstances, including (i) meals provided during an entertainment activity, (ii) meals incurred while traveling, and (iii) meals provided for the convenience of the employer.  In general, meals and beverages are generally deductible (to the extent of 50% of the cost, unless exceptions apply) when they are not (i) lavish or extravagant under the circumstances, (ii) the taxpayer or an employee is present when serviced, and (iii) when provided to a “business associate.” 

The definition of food and beverages encompasses the full cost of the items, including delivery fees, tips, and sales tax.  A business associate can be a customer or client, supplier, agent, partner, employee or professional advisor, whether established or prospective. 

The proposed regulations also provide that not all meal arrangements are limited to a 50% deduction. These meals, for instance, continue to be deductible in full:

  • Expenses for food and beverage treated as compensation to an employee;
  • Expenses for food and beverage treated as income to a person other than an employee;
  • Expenses incurred in connection with the performance of services for another person under a reimbursement or other expense allowance arrangement;
  • Expenses for food or beverage paid or incurred for recreational, social or similar activities primarily for the benefit of employees; 
  • Expenses for food and beverage made available to the general public; and 
  • Expenses for food and beverage that is sold to customers in a bona fide transaction.

The proposed regulations provide a number of examples involving the deductibility of various entertainment, food, and beverages, including: 

  • Taxpayer invites a business associate to a baseball game to discuss a business deal.  Result: the tickets are nondeductible entertainment, but hotdogs and a drink are 50% deductible when purchased separately.
  • Taxpayer invites a business associate to a basketball game to discuss a business deal.  The price of the ticket includes meals and beverages.  Result: neither the tickets nor the meals are deductible, since the meal is not separately stated and the tickets are entertainment.
  • Taxpayer takes client to lunch to discuss business. Result: meal is 50% deductible.
  • Taxpayer takes employee to lunch to discuss annual review: Result: meal is 50% deductible.
  • Employer invites all employees to annual holiday party.  Result: cost of the party, including foods, is 100% deductible. 
  • Employer provides free coffee, soda, bottled water and various snacks in a break room to all employees. Result: Only 50% of the cost is deductible. 

Taxpayers can choose to rely on the proposed regulations for entertainment, food, or beverage expenses paid or incurred after December 31, 2017, or they can rely on the guidance in Notice 2018-76 until the proposed regulations are finalized.  Hearings on the proposed regulations are scheduled for April 7 (which could result in changes to the proposed regulations). 

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