On October 4th, the IRS issued Notice 2018-76 along with an information release, clarifying the deductibility of meals purchased in an entertainment context. The Notice can be viewed in its entirety by clicking here. An updated meals and entertainment chart can also be viewed by clicking here.
The IRS guidance is generally good news. The Tax Cuts and Jobs Act (“TCJA”), passed in late December 2017, disallowed deductions for entertainment, amusement and recreational expenses. The language of the TCJA however, was vaguely drafted in several respects relating to meals and entertainment, including meals and beverage expenses associated with entertainment. In the aftermath of the TCJA, most practitioners believed it was likely that meals and beverages consumed directly before, during or after an entertainment event would be considered to be part of the entertainment itself, and thus 100% non-deductible. This recent guidance allays those fears and allows a deduction of 50%, as long as:
- The expenses are ordinary and necessary in carrying on a trade or business,
- The expenses are not lavish or extravagant,
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages,
- The food or beverages are provided to a current or potential business customer, client, consultant or similar business contact, and
- The food or beverages are purchased separately from the entertainment, or the cost is separately stated on one or more bills, invoices or receipts. Examples 2 and 3 of the Notice clearly demonstrate this requirement.
Notice 2018-76 also makes it clear that the IRS intends to publish Proposed Regulations under Code § 274 to give further guidance on the deductibility of expenses for certain business meals. Until those Proposed Regulations are effective, taxpayers may rely on the guidance set forth by Notice 2018-76.
If you have any questions or would like to further understand the impact this may have on you or your business, please contact your GBQ tax professional.