IRS recently released final rules related to the deductibility of Meals and Entertainment. We always want our clients to be in-the-know of tax updates that could impact their business operations. Below you’ll find outlined details regarding this update, as well as additional information on how the Tax Cuts and Jobs Act may impact your personal and business tax planning.
Final Rules for Business Meals (source IRS T.D. 9925)
Under the final rules, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under the § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is 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; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Examples are included at the end of this email.
Final Rules for Non-Deductible Entertainment
The term entertainment means any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family. These activities are treated as entertainment under this code section, subject to the objective test, regardless of whether the expenditure for the activity is related to or associated with the active conduct of the taxpayer’s trade or business.
Some Exceptions to The Non-Deductible Entertainment Rule
Food and beverage expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees are still deductible. An example of this would be office parties.
In the case of entertainment expenditures, they are no longer deductible unless one of the nine exceptions to section 274(a) in section 274(e) applies. These exceptions are:
- Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for his employees.
- Expenses for services, goods, and facilities that are treated as compensation and as wages for the recipient for purposes of chapter 24 (withholding tax purposes). If the recipient is a specified individual (i.e an officer, director, or 10-percent shareholder or related person), the employer deduction is limited to the compensation reported.
- Reimbursed expenses – Expenses paid or incurred by the taxpayer, in connection with the performance of services for another person – whether or not such other person is his employer. This applies only: (1.) if the services relating to the expenses are performed for an employer that has not treated the expenses as wages subject to withholding, or (2.) if the services are performed for a person other than an employer and the taxpayer incurring the reimbursed expenses accounts to that person.
- Expenses for recreational, social, or similar activities primarily for the benefit of employees who are not highly compensated.
- Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors.
- Expenses directly related and necessary for attendance at a business meeting or convention of any tax-exempt organization (business league, including a real estate board, chamber of commerce or board of trade).
- Expenses for goods, services, and facilities made available by the taxpayer to the general public.
- Expenses for entertainment sold to customers in a bona fide transaction for an adequate and full consideration in money or money’s worth.
- Expenses paid or incurred for goods, services, and facilities to the extent that the expenses are includible in the gross income of a recipient of the entertainment, amusement, or recreation who is not an employee of the taxpayer as compensation for services rendered or as a prize or award.
Business meals provided to employees are still deductible, however only at 50%, whereas it was 100%. If no future action takes place from Congress, beginning in 2025 those meals will no longer be deductible. This also includes water, coffee, and snacks provided as a convenience for employees in the office.
For each example, assume that the food and beverage expenses are ordinary and necessary expenses under § 162(a) paid or incurred during the taxable year in carrying on a trade or business and are not lavish or extravagant under the circumstances. Also assume that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity.
EXAMPLE 1 –(i) Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.(ii) The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets is not an entertainment expense and is not subject to § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
EXAMPLE 2 –(i) Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.(ii) The basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment that is subject to the § 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.
EXAMPLE 3 –(i)Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.(ii) As in Example 2, the basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to § 274(a)(1) disallowance. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.