On February 21, 2020, the IRS released proposed rules to address the changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) on the ability of businesses to take deductions for meal and entertainment expenses. The TCJA has essentially eliminated the ability of taxpayers to deduct entertainment expenses while maintaining the ability for them to deduct 50 percent of the costs of business meals.
The proposed regulations were primarily issued to provide clarification on what constitutes entertainment and when business meals are deductible. In general, the proposed regulations adhere to the notice issued on October 15, 2018 by the IRS providing guidance on when taxpayers are allowed to deduct business meals. Under the notice, taxpayers may take the deduction if:
- the expense is an ordinary and necessary expense under section 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.
In adopting these requirements, the proposed regulations clarify that food provided at an entertainment activity, such as a ballgame or a concert, must be separately itemized and consistent with the venue's usual selling costs for those items in order for the expenses to be deductible.
The proposed regulations also provide a definition for who is considered a "business associate" as any "person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective."
Employers who provide snacks, such as free coffee, soda, bottled water, donuts, and chips, to its employee in break-rooms or on-site meals for the employer's convenience are also impacted by the TCJA. Previously, employers could deduct the entire cost of providing such perks. Now, employers may only deduct 50 percent of these benefits. The proposed regulations clarify that the exception to the deduction disallowance for entertainment expenses incurred for providing recreation primarily for the benefit of employees does not apply to free food and beverages provided in a break room because "the mere provision or availability of food or beverages is not a recreational, social, or similar activity."
Those affected by the proposed regulations may submit comments to the IRS. The IRS will hold a public hearing on these proposed regulations on April 7, 2020.
