Prior to the Tax Cuts and Jobs Act (TCJA), businesses could deduct up to 50% of total meals and entertainment expenses incurred in connection with a bona fide business purpose. The 2017 TCJA uprooted this deduction by specifically prohibiting any deductions for expenses considered to be entertainment, amusement, or recreation (“entertainment expenses”). While it was made clear that entertainment expenses would no longer be deductible, the act lacked clarification related to the deductibility of business meals, until now.
In a recent guidance issued by the IRS, clarification was provided that stated taxpayers may continue to deduct 50% of the food and beverage expenses under Sec. 274, despite the changes made by the TCJA to entertainment expenses. Section 274 generally provides that no food or beverage deduction may be allowed unless:
(A) The expense is not lavish or extravagant under the circumstances, and
(B) The taxpayer (or an employee of the taxpayer) is present upon furnishing of such food or beverages, and
(C) The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact, and
(D) For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of entertainment on one or more bills, invoices, or receipts.
The IRS has made it clear that there will be no tolerance for inflated meals and beverage costs in order to circumvent the entertainment disallowance and tracking of these costs separately will be highly encouraged.
We recommend that businesses continue to connect with the tax advisor on this topic as the notice explicitly stated that the Department of Treasury and the Internal Revenue Service intend to publish proposed regulations under Section 274, which will provide additional guidance on the deductibility of business meals.
If you would like to know more about these rules, contact a DKB team member today!
