IRS Says Business Meals Remain Deductible, But Cannot Be ‘Lavish’ or Mixed With Entertainment Costs

October 24, 2018 Tax Alert

Resolving widespread confusion, the IRS this month issued important guidance that clarifies when meals or drinks will be allowed as a deductible business expenses following the changes made by the Tax Cuts and Jobs Act.

The TCJA generally disallowed any deduction for expenses related to entertainment, amusement or recreation. But the law did not specifically address the deductibility of business meals or the food and beverage expenses incurred in connection with a sporting event, recreation or other entertainment.

Now the IRS has issued transitional guidance in Notice 2018-76 that sets forth a clear test for determining whether a business expense for food and beverages is deductible.

Under the interim guidance, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:

  • The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when 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 when the food or beverages are furnished;
  • The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  • For food and beverages provided during or at an entertainment activity, they 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.

The guidance includes several examples that illustrate how the IRS intends to interpret the rules, using a scenario attending a sporting event with a business client and having food and drink while attending the game.

Generally, the IRS explains that meal expenses will be deductible when their costs are separately stated from the cost of the entertainment or sporting event.

The IRS is requesting comments by Dec. 2 on the interim guidance.

Companies that entertain current and prospective clients should review their accounting procedures to ensure that food and beverage costs are properly segregated from entertainment expenses.

If you have questions about this alert or any business expense tax questions, please contact James W. Minorchio at [email protected] or 206.389.1658 or any member of Fox Rothschild’s Taxation & Wealth Planning Group.