For months, the American Institute of CPAs (AICPA) and American businesses have been requesting guidance from the U.S. Treasury Department and Internal Revenue Service (“IRS”) regarding changes made by the Tax Cuts and Jobs Act (TCJA) (Pub. L. No. 115-97). These changes disallowed the deductibility of entertainment, amusement, recreation and qualified transportation fringe expenses beginning in 2018.
Prior to 2018, a business could deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. That deduction is no longer available.
Businesses and their accounting professionals requested further guidance to ensure their accounting systems and expense and reimbursement policies comply with the IRS’ interpretation of the TCJA with arguably entertainment-related types of expenses, such as meals and entertainment. Aside from these systemic considerations, the tax treatment also impacts the utility of the expenses themselves. Without the tax deduction, the business’ ultimate cost for those activities is greater, which could cause some decision makers to limit or eliminate their use.
In April, the AICPA requested “immediate guidance” regarding IRS treatment of business meals and other areas, specifically:
- Client-related business meals
- With current and prospective clients incurred at times other than before, during or after an entertainment event
- With current and prospective clients incurred before, during or after an entertainment event
- Employer-provided business meals
- Related to restaurant and food service workers
- Definition of “facility”
- Employer-provided snacks and other food products
- Employer-hosted recreational, social and similar activities
- Charitable contributions
- Qualified transportation
- Transportation and commuting
- Membership dues
Some of that guidance has now arrived. The IRS recently clarified that while the 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation, taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customers, clients, consultants or similar business contacts. Importantly, food and beverages that are provided during entertainment events will not be considered non-deductible entertainment if purchased separately from the event cost. For example, if you take a client to a Dodger game, you cannot deduct the cost of the tickets, but you can take a deduction for 50% of the Dodger dogs you purchase for you and your client to eat while you watch the game.
The Department of the Treasury and the IRS expect to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment. Until then, the IRS continues to direct taxpayers to the guidance in Notice 2018-76.
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