Meals & Entertainment Tax Deductions

Meals & Entertainment

Remember the Tax Cuts and Jobs Act (TCJA) largely eliminated the deduction for entertainment expenses paid or incurred after 12/31/17, but left intact certain exceptions. The IRS has now issued final regulations largely follow proposed regulations issued in February 2020 and Notice 2018-76 , with a few modifications in response to comments. The guidance distinguishes entertainment from meals, reinforces exceptions that continue to allow a full deduction, and clarifies business meal deductibility.

Entertainment

Business-related entertainment expenses were previously allowed a 50% deduction. The TCJA changed this by generally disallowing deductions related to entertainment, amusement, or recreation, even when business related [ IRC Sec. 274 ; Reg. 1.274-11(a) ]. Reg. 1.274-11(c) , however, provides an important reminder that exceptions under IRC Sec. 274(e) were not changed by the TCJA and remain available to allow deductions for certain business-related entertainment expenses. The nine exceptions to entertainment disallowance are as follows:

• On site food and beverages for employees, including expenses for related facilities.
• Expenses treated as compensation.
• Reimbursed expenses under an accountable plan.
• Expenses for recreational, social, or similar activities primarily for the benefit of employees.
• Expenses directly related to business meetings of employees, stockholders, agents, or directors.
• Expenses related to attending business league or chamber meetings.
• Items made available to the general public.
• Entertainment sold to customers.
• Expenses includable in the income of persons who are not employees of the taxpayer.

If these items are related to otherwise deductible business meals, they may be 100% deductible, depending on whether they meet a further exception discussed next.

Meals

 IRC Sec. 274(n)(1) generally limits a deduction for business-related food and beverage expense to 50% of the expenditure [ Reg. 1.274-12(a)(2) ]. Taxpayers may deduct 50% of business food and beverages if:

• the expense is not lavish or extravagant under the circumstances [ 1.274-12(a)(1)(i) ],
• the taxpayer, or an employee of the taxpayer, is present [ 1.274-12(a)(1)(ii) ],
• the food or beverage is provided to the taxpayer or a business associate, which includes clients and employees [ 1.274-12(a)(1)(iii) ], and
• food and beverages are purchased separately or separately stated on a receipt if provided during an entertainment activity [ 1.274-11(b)(1)(ii) ].

However, Reg. 1.274-12(c) provides that the following exceptions under IRC Sec. 274(e) allow for a full deduction of business-related food and beverages:

• Expenses treated as compensation.
• Reimbursed food or beverage expenses.
• Expenses for recreational, social, or similar activities primarily for the benefit of employees.
• Items made available to the general public.
• Goods or services sold to customers.
• Expenses includable in the income of persons who are not employees of the taxpayer.

Recall that before the TCJA, onsite business meals provided to employees were 100% deductible, but are now 50% deductible.