Entertainment Expenses are NOT Deductible but Meals are
The IRS recently issued guidance clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Notice 2018-76). According to the IRS, the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but do not address the deductibility of expenses for business meals. This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.
Sec. 274(k), which was not amended by the TCJA, does not allow a deduction for the expense of any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished. Sec. 274(n)(1), which was amended by the TCJA, generally provides that the amount allowable as a deduction for any expense for food or beverages cannot exceed 50% of the amount of the expense that otherwise would be allowable.
The interim guidance explains taxpayers may deduct 50% of an otherwise allowable business meal expense if:
The IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.
The notice includes three examples illustrating how the IRS will view these rules. All three examples involve attending a sporting event with a business client and having food and drinks while attending the game.
Thank you for taking the time to read this e-alert. If I can be of service, please do get in touch by e-mail or telephone.
Alicea Castellanos, CPA, TEP, N.P.
CEO & Founder
Global Taxes LLC
Tax Advisory & Compliance Services
Tel: 212 803 3327
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Alicea Castellanos | 02/05/2019