The Internal Revenue Service issued Notice 2018-76 (Notice) on October 3, 2018, which provides transitional guidance regarding the deductibility of certain meal expenses. The Notice specifies that taxpayers may rely on the transitional guidance until the IRS issues proposed regulations.
Effective as of 2018, The Tax Cuts and Jobs Act of 2017 disallowed the deduction of all entertainment expenses, including those expenses directly related to an active business or involving a business discussion. Non-entertainment meal expenses, however, remain deductible, subject to the 50% limit under IRC Section 274(n)(1).
The Notice provides that, until the IRS issues proposed regulations, taxpayers may deduct 50% of an otherwise allowable business meal expense, if all the following conditions are met:
- The expense is an ordinary and necessary expense under IRC Section 162(a) and is paid or incurred during the taxable year in carrying on the 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.
- The Notice also clarifies that the entertainment disallowance rule cannot be circumvented through inflating the amount charged for food and beverages.
The Notice further states that the Treasury Department and the IRS intend to issue separate guidance under IRC Section 274(e)(1) and 274(n) addressing the treatment of expenses for food and beverages furnished primarily to employees on the employer’s business premises.
Public comments in relation to the Notice are due by December 2, 2018.
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.
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