Final regulations issued on deductibility of meals and entertainment expenses
Internal Revenue Code (IRC) Section 274 generally limits or disallows deductions for certain meal and entertainment expenditures. For meal and entertainment expenditures paid or incurred prior to Jan. 1, 2018, taxpayers generally could deduct 50% of these costs. However, the Tax Cuts and Jobs Act (TCJA) amended Section 274 such that taxpayers generally cannot deduct entertainment expenditures, while the costs of non-entertainment food and beverages generally remain 50% deductible (certain exceptions apply for each rule). In February 2020, the IRS and the Treasury issued proposed regulations meant to implement the changes.
On Sept. 30, the IRS and Treasury published final regulations that generally adopt the proposed regulations. Read on for a summary of the key points.
Entertainment – Expense disallowance rules
Consistent with the proposed regulations and the statute, the final regulations state that no deduction is allowed for business-related entertainment expenses. This disallowance applies even where the entertainment activity is “related to or associated with the active conduct of the taxpayer’s trade or business.” Nondeductible entertainment expenses are defined as those for entertainment, amusement, or recreation (such as entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and hunting and fishing trips) and include dues or fees paid to any social, athletic, or sporting club or organization.
Taxpayers must determine whether food and beverage costs will be treated as a disallowed entertainment expense or as a “food and beverage” cost subject to the limitations below. Where food and beverages are provided during an entertainment activity, the food and beverage expenses will be treated as an entertainment expense, unless they are stated separately from the entertainment expenses on bills, invoices, or receipts. If the food and beverage expense is not stated separately, the taxpayer is not permitted to allocate any portion of that cost to – and may not treat any of that cost as – deductible food and beverage expense.
There are numerous exceptions to the rule disallowing entertainment expenses. The final regulations do not make significant changes to those rules, but provide clarification. Those exceptions are:
1. Food and beverages provided to employees
2. Expenses treated as compensation
3. Reimbursed expenses
4. Recreational expenses for employees
5. Employees, stockholder, etc., business meetings
6. Meetings of business leagues, etc.
7. Items available to the public
8. Entertainment sold to customers
9. Expenses includible in income of persons who are not employees
Food and beverages – 50% limitation
The final regulations define food or beverage expenses as the cost of food or beverages, including any delivery fees, tips, and sales tax. Consistent with the proposed regulations and the statute, the final regulations state that for 50% of the cost of food and beverages to be deductible, the expenses must be ordinary and necessary business expenses, the food and beverages purchased must not be “lavish or extravagant,” and the taxpayer or its employee must be present. The deduction limitation rules “generally apply to all food and beverages, whether characterized as meals, snacks, or other types of food or beverage items,” the final regulations say.
As outlined in the proposed regulations, the final regulations state that food and beverages that constitute de minimis fringe benefits are also subject to the 50% deduction limitation. (Prior to the enactment of the TCJA, the costs associated with this would not have been subject to this limitation).
The exceptions above numbered 2, 3, 4, 7, 8, and 9, apply to food and beverage expense limitations. (Those numbered 1, 5, and 6 are not applicable to these limitations). The final regulations incorporate several example scenarios involving the deductibility of food or beverage expenses, including: 1) snacks available to employees in a pantry, break room, or copy room; 2) food or beverages provided by a seasonal camp to camp counselors; 3) food or beverages provided to employees at a company cafeteria; and 4) food or beverages provided at company holiday parties and picnics.
Travel meal expenses
The final regulations also clarify certain rules related to travel meal expenses, specifically those related to travel meal expenses of spouses, dependents, or others accompanying employees or owners during business travel.
Applicability date: Once a taxpayer applies these final regulations in their entirety for a taxable year, the taxpayer must continue to apply them for subsequent taxable years.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Press ReleaseSolarz joins CohnReznick as National Tax Managing DirectorCohnReznick LLP, one of the leading advisory, assurance, and tax firms in the United States, today announced that Alan H. Solarz, JD, CPA, has joined the firm as Managing Director in its rapidly growing National Tax practice. Based in New York, Solarz has more than 35 years of experience as a transactional tax lawyer and tax advisor.
InsightIRS provides additional ERC guidance on calculations for newer businesses, majority owners’ wages, PPP loan forgiveness as gross receipts, and moreDana FriedNotice 2021-49 and Revenue Procedure 2021-33 cover majority owners’ wages as Qualified Wages; PPP forgiveness amounts and the gross receipts test; and more.
InsightIRS provides guidance on changing method of accounting for depreciation of certain residential rental propertyRichard Shevak, Travis Butler, Timothy McMillanRevenue Procedures 2021-28 and 2021-29 explain how electing RPTOBs and BBA partnerships can change their accounting methods for certain property’s depreciation.
InsightSupreme Court decision on Affordable Care Act cuts possibility of tax refundsPatrick Duffany, Brian Newman, Dan WiseThe Supreme Court’s ruling in California v. Texas means that taxpayers should not expect refunds related to any protective claims filed. Read more.
InsightCOBRA premium assistance, employer tax credit available for 2021 Q2 and Q3Dana FriedRead key details of the American Rescue Plan Act’s Q2-Q3 COBRA premium assistance and employer tax credit: eligibility, taxation, how to claim the credit, and more.