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.

    What does CohnReznick think?

    Taxpayers should consult their tax advisors to review their facts and determine the best course of action. These final regulations provide important clarifications regarding the definition of entertainment, the deductibility of entertainment expenditures, and illustrative examples regarding the treatment of food and beverage expenses. Contact our National Tax Office to discuss your options or for assistance with the preparation of any necessary filings.

    Contact

    Travis Butler, Director, National Tax

    312.508.5821

    Timothy McMillan, CPA, Manager, National Tax

    973.364.7706

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    • Contact Richard Richard+Shevak richard.shevak@cohnreznick.com
      Richard Shevak

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    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 legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. 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 partners, 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.