IRS Issues Guidance on Business Meals Deduction

November 2, 2018 News

by Laurie J. Vitullo, CPA

When the Congress enacted the Tax Cuts and Jobs Act (TCJA), it eliminated the expense deduction for entertainment, amusement and recreation. In the absence of final regulations, the Treasury issued Notice 2018-76, to answer many of the questions that arose about the continued deductibility of business meals. The Notice provides the circumstances that expenses for meals would still be deductible (subject to the 50% expense limitation).

The criteria for the 50% deduction of food and beverage are as follows:

  1. The expense is ordinary and necessary when paid or incurred during the tax year in carrying on trade or business,
  2. The expense is not lavish or extravagant under the circumstances.
  3. The Taxpayer or an employee of the taxpayer is present while the food and beverage is being consumed.
  4. The food and beverages are provided to current or potential business customers, clients, consultants or similar business contacts.
  5. In the case of food and beverages provided during an entertainment activity, the food and beverage is purchased separately from the entertainment or the cost is separately stated from the cost of the entertainment on one or more bills, invoices or receipts.

The Notice provides three examples where it is assumed that the food and beverage expense meet the first criteria allowed for the 50% deduction.

Example 1- The taxpayer takes a business contact to an entertainment activity (a baseball game).The game tickets are purchased separately and is a nondeductible expense. The buying of hot dogs and drinks at the game, is a deductible expense (subject to the 50% limitation), since it is purchased separately.

Example 2 and 3- The taxpayer takes a business contact to a basketball game, a nondeductible entertainment activity. When the food and beverage is included with the price of the tickets and not shown separately, the expense is disallowed. When the cost of the food and beverage is stated separately, the cost is deductible.

Until the IRS issues proposed regulations, taxpayers can rely on this Notice for guidance. Remember that substantiation and proper receipts are critical to the allowance of this meal deduction. Additional guidance for meals and beverages supplied to employees on the employer’s premises is also expected.