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02/27/2020
Proposed regulations clarify deduction rules for meals and entertainment expenses
Effective for 2018, the Tax Cuts and Jobs Act of 2017 (TCJA) eliminated the 50% deduction under Internal Revenue Code (IRC) Section 274 for entertainment, amusement, or recreation expenses, making them fully non-deductible, and revised the rules regarding the 50% limitation for deductible food and beverage expenses. In October 2018, the IRS issued Notice 2018-76 to provide interim guidance on those changes until the issuance of proposed regulations.
The proposed regulations were recently issued, generally following the guidance provided under Notice 2018-76, but with additional clarification and examples. Until the regulations are finalized, for expenses paid or incurred after 2017, taxpayers may rely on the deduction rules under the proposed regulations or those under Notice 2018-76.
Highlights of the proposed regulations
Entertainment
- No deduction for business-related entertainment expenses. The deduction disallowance for entertainment expenses applies even where the activity is related to or associated with the active conduct of the taxpayer’s trade or business. (The pre-TCJA “directly related” and “business discussion” requirements no longer apply to the deductibility of entertainment expenses.)
- Entertainment expenses. Nondeductible entertainment expenses are 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.
- Separately stated food or beverage expenses are not entertainment expenses. Where food and beverages are provided at an entertainment activity, if those expenses are stated separately from the entertainment expenses on bills, invoices, or receipts, the food and beverage expenses are not subject to the entertainment expense deduction disallowance.
- Exceptions to entertainment expense deduction disallowance. Exceptions include entertainment expenses that are:
o Treated as employee or independent contractor compensation for tax purposes.
o A facet of employee recreational or social activities (e.g., company holiday parties, annual picnics, summer outings), other than those that discriminate in favor of highly compensated employees, officers, shareholders, or others who own a 10% or greater interest in the business.
o Part of an employee, stockholder, agent, or director business meeting or convention.
o Part of a business meeting or convention of a tax-exempt business league, chamber of commerce, real estate board, or board of trade.
o For entertainment sold to customers “in a bona fide transaction for an adequate and full consideration in money or money’s worth” (not services).
Food and beverages
- Reasonable expenses and taxpayer/employee presence. For the 50% deduction to be available, 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.
- Business associates requirement. The food or beverages must be provided to one or more “business associates” – established or prospective customers, clients, suppliers, employees, agents, partners, or professional advisors.
- De minimis fringe benefits subject to 50% deduction limitation. The pre-TCJA exclusion from the 50% deduction limitation for food and beverages that constitute non-taxable employee de minimis fringe benefits no longer applies.
- Exceptions to food and beverage expenses 50% deduction limitation. Exceptions include food and beverage expenses that are:
o Treated as employee or independent contractor compensation for tax purposes.
o Part of employee recreational or social activities (e.g., company holiday parties, annual picnics, summer outings), other than those that discriminate in favor of highly compensated employees, officers, shareholders, or others who own a 10% or greater interest in the business. (This exception does not apply to expenses that are non-taxable to employees as meals provided for the convenience of the employer.)
o Meal and beverages provided to employees where similar food and beverages are made available to and primarily (greater than 50%) consumed by the general public (e.g., where a restaurant or catering business provides on-site meals to its employees).
o For meals and beverages sold to customers “in a bona fide transaction for an adequate and full consideration in money or money’s worth” (not services).
What does CohnReznick think?
As was expected, the proposed regulations are consistent with the guidance provided in 2018 under IRS Notice 2018-76, but go into greater detail and provide many helpful examples. Comments on the proposed regulations are required to be submitted by mid-April, and final regulations hopefully will be issued by the summer.Subject matter expertise
Dana Fried
JD, LLM, Managing Director - National Tax Services
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