By Joanna Piscitella, CPA
The Internal Revenue Service has issued final regulations on the business expense deduction for meals and entertainment following changes made by the 2017 Tax Cuts and Jobs Act (TCJA).
The Treasury Department and the IRS did not receive any requests to speak at a public hearing on the proposed regulations but they had received written and electronic comments in response to the proposed regulations.
These written comments were incorporated into the new regulations.
As a reminder, the 2017 TCJA generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. However, taxpayers may still deduct business expenses related to food and beverages if certain requirements are met (Typically limited to 50 percent of the expenditure).
These final regulations address the disallowance of the deduction for expenditures related to entertainment, amusement or recreation activities, including the applicability of certain exceptions to this disallowance. They also provide guidance to determine whether an activity is considered entertainment. The final regulations also address the limitation on the deduction of food and beverage expenses.
Prior to amendment by the TCJA, section 274(n)(1) generally limited the deduction of food or beverage expenses and entertainment expenditures to 50 percent of the amount that otherwise would have been allowable. Thus, under prior law, taxpayers could deduct 50 percent of meal expenses, and 50 percent of entertainment expenditures that met the directly related or business discussion exceptions.
Distinguishing between meal expenses and entertainment expenditures was previously unnecessary for purposes of the 50 percent limitation but with the advent of the 2017 TCJA rules this became an issue.
TCJA repealed the directly related and business discussion exceptions to the general prohibition on deducting entertainment expenditures. Thus, entertainment expenditures are no longer deductible unless one of the nine exceptions applies.
The regulations provide that the term “entertainment” does not include food or beverages unless the food or beverages are provided at or during an entertainment activity. Food or beverages provided at or during an entertainment activity generally are treated as part of the entertainment activity.
However, in the case of food or beverages provided at or during an entertainment activity, the food or beverages are not considered entertainment if the food or beverages are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
An objective test is used to determine whether an activity is of a type generally considered to be entertainment. Thus, if an activity is generally considered to be entertainment, it will be treated as entertainment regardless of whether the expenditure can also be described otherwise, and even though the expenditure relates to the taxpayer alone.
However, in applying this test the taxpayer’s trade or business is considered.
As an example, attending a theatrical performance generally would be considered entertainment, it would not be so considered in the case of a professional theater critic attending in a professional capacity. Similarly, if a manufacturer of dresses conducts a fashion show to introduce its products to a group of store buyers, the show generally would not be considered entertainment. However, if an appliance distributor conducts a fashion show, the fashion show generally would be considered to be entertainment.
As another example Taxpayer A invites, B, a business associate, to a baseball game to discuss a proposed business deal. Taxpayer A purchases tickets for A and B to attend the game. The baseball game is entertainment as defined in the regulations and thus, the cost of the tickets is an entertainment expenditure and is not deductible by A.
While at the game A also buys hot dogs and drinks for A and B from a concession stand. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expenditure and is not subject to the disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
Changing those facts slightly if A purchased tickets to attend the game in a suite, where they have access to food and beverages the result will be different. The cost of the game tickets, as stated on the invoice, includes the food or beverages. The game is entertainment therefore the cost of the game tickets is an entertainment expenditure and is not deductible (same as noted above).
Thus, the cost of the food and beverages is also an entertainment expenditure that is subject to disallowance and may not deducted either because the food and beverages are not separately stated. Therefore, in this case the cost of the tickets for the game and the food and beverages are not deductible.
Perhaps your business holds business meetings at a hotel during which food and beverages are provided to attendees. Expenses for the business meeting, other than the cost of food and beverages, are not subject to the deduction limitations. In all likelihood you may deduct 50 percent of the food and beverage expenses.
Understanding these rules, and more, is important if meals and entertainment are integral to your business.