IRS Issues Final Regs on Meals & Entertainment Deduction

The Tax Cuts and Jobs Act (TCJA) generally eliminated the deduction for business expenses considered to be entertainment, amusement, or recreation. However, under the new law, taxpayers can continue to deduct 50% of the cost of business meals as long as those expenses meet these criteria:

1. The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying out a 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 at the furnishing of the food or beverages
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact
5. 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 stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

IRS Notice 2018-76 provides a couple of examples of this rule:

Example 1.

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.

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 the § 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.

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.

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 expense that is subject to the § 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.