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Business meals 50% deductible under interim IRS guidance

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Business lunchThe IRS has issued a notice (Notice 2018-76) announcing its intention to publish proposed regulations under Section 274 that will provide guidance on the deductibility of expenses for certain business meals. Until the proposed regulations are effective, taxpayers can rely on guidance in the notice to deduct 50% of business meals meeting certain criteria.

Background The Tax Cuts and Jobs Act (TCJA) eliminated the ability for businesses to deduct entertainment expenses (unless certain narrow exceptions apply) for amounts paid or incurred after Dec. 31, 2017. The definition of entertainment in existing regulations is broad enough to include meal expenses. However, the TCJA left intact the overall 50% limit on the deductibility of meal expenses, and its legislative history provides that taxpayers generally could continue to deduct 50% of meal expenses associated with operating their business. Therefore, a lack of clarity exists regarding whether businesses can continue to deduct 50% of business meals paid or incurred after Dec. 31, 2017. 

Meal expenses that qualify under the notice Under the notice, taxpayers may deduct 50% of an otherwise allowable business meal expense if: 

  1. The expense is an ordinary and necessary expense under Section 162(a) paid or incurred during the taxable year in carrying on any trade or business.
  2. The expense is not lavish or extravagant under the circumstances.
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages.
  4. The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
  5. 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 entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

The notice provides three examples illustrating the above rules where food and beverages are provided during a sporting event attended by a taxpayer and a business contact. In two of the examples, food and beverages are purchased separately from the price of the game ticket or are invoiced separately. The notice concludes that 50% of the food and beverage expense is deductible. In another example, food and beverages are not separately purchased or separately invoiced from the game ticket and the notice concludes that none of the food or beverage cost is deductible.

Next steps Taxpayers that incur meal expenses prior to the effective date of the proposed regulations (to be issued in the future), and that meet the five requirements in the notice can deduct 50% of meal expenses. Taxpayers will need to re-evaluate the ability to deduct such costs after the proposed regulations are issued.

For more information on changes made by the TCJA to the deductibility of meals, travel, and entertainment, see our FAQ.

For more information contact: David Auclair
Managing Principal
Washington National Tax Office 
Grant Thornton LLP
T +1 202 521 1515
 
Debbie Shi
Manager
Washington National Tax Office
Grant Thornton LLP
T +1 202 521 1501

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