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IRS Restores Popular Business Meal Deduction

For many taxpayers who believed they had seen the end of one of their favorite tax deductions, the business meal deduction, a recently released Treasury Notice 2018-76 is a cause for celebration. Notice 2018-76 provides temporary guidance to taxpayers who incur meals and entertainment expenses after the effective date of Tax Cuts and Jobs Act 2017 (“TCJA”).

Prior to the effective date of the TCJA, taxpayers were allowed, under certain conditions, to take a deduction under Section 274 of the Internal Revenue Code (IRC) for expenses incurred with respect to an activity considered to constitute entertainment, amusement, or recreation (“entertainment expenses”). For deductibility, the expenditure had to be (1) directly related to the active conduct of the taxpayer’s trade or business or (2) directly preceding or following a substantial and bona fide business discussion concerning the active conduct of the taxpayer’s trade or business.

Business meals were deductible under Section 274 if the purchase was not lavish or extravagant and a taxpayer or an employee of the taxpayer was present at the furnishing of the items.

The TCJA repealed the conditions that allowed for the deductibility of entertainment expenses. Thus, under the TCJA, entertainment expenses are no longer deductible. Notice 2018-76 temporarily, however, defines entertainment expense. According to the notice, the term should not be construed to prohibit a deduction for non-entertainment type of activities such as providing (a) dinner money to an employee working overtime, (b) a hotel room for the lodging of employees while traveling for business related matters; or (c) an automobile used in the active conduct of a trade or business even if it is also used for routine personal purposes.
The TCJA should also not be interpreted, as stated in the notice, as barring the deduction for business meals. With respect to the deductibility of business meals, Notice 2018-76 provides the following guidance.

A taxpayer may still deduct 50 percent of an otherwise allowable business meal if:

  • The expense is an ordinary and necessary expense under § 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 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 an entertainment activity, the food and beverages are purchased separately from the entertainment, or the meal and entertainment are stated separately on the bill, invoice or receipt.
  • The Department of the Treasury and the IRS are expected to issue proposed regulations clarifying what constitutes an entertainment expense and when expenditures for business meals are deductible.

Should you have any questions about Notice 2018-76, please contact your local Withum tax adviser or fill in the form below and we’ll reach out to you.

 

Author: Marcus Dyer, Esq, CPA | mdyer@withum.com

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