Can I Deduct That Business Meal?

The 2017 Tax Cuts and Jobs Act expressly repealed the deductions for entertainment, amusement, or recreation.  However, the Act did not specifically address the deductibility of expenses for business meals.

On October 3, 2018, the IRS issued Tax Notice 2018-76 which provides guidance on the deductibility of meals purchased in an entertainment context.  This notice can be relied upon for guidance until the IRS issues proposed regulations.

Under IRS Tax Notice 2018-76, taxpayers may deduct 50 percent of an otherwise allowable business meal expense IF:

1. The expense is an ordinary and necessary expense 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; and
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.

To further clarify…

For each example below, assume that the food and beverage expenses are ordinary and necessary expenses in carrying on a trade or business and are not lavish or extravagant under the circumstances.  Also assume that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity.

Example 1 – Taxpayer A invites B, a business contact, to a baseball game.  A purchases tickets for A and B to attend the game.  While at the game, A buys hot dogs and drinks for A and B.

In this example, the baseball game is entertainment as defined in IRS Regulation 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A.  The cost of the hot dogs and drinks, which were purchased separately from the game tickets, is not considered to be a non-deductible entertainment expense.  Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2 – Taxpayer C invites D, a business contact, to a basketball game.  C purchases tickets for C and D to attend the game in a suite where they have access to food and beverages.  The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

Again, the basketball game is entertainment as defined by the IRS regulation referenced in Example 1, and the cost of the game tickets is an entertainment expense and not deductible by C.  The cost of the food and beverages, which were not purchased separately from the game tickets, is not stated separately on the invoice.  Thus, the cost of the food and beverages is also an entertainment expense and C may not deduct any of the expenses associated with the basketball game.

Example 3 – Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

Once again, the basketball game is entertainment as defined in the IRS regulation referenced above, and the cost of the game tickets (other than the cost of the food and beverages) is an entertainment expense and not deductible by C.  However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not considered to be a non-deductible entertainment expense.  Therefore, C may deduct 50 pcercent of the expenses associated with the food and beverages provided at the game.

Have questions about this new guidance and what it means to you?  Give us a call at 301.662.9200.