Last week, the IRS issued Notice 2018-76 confirming that certain business meals will continue to be deductible, subject to the 50% limitation, despite changes to the meal and entertainment expense deduction unveiled under the Tax Cuts and Jobs Act ("TCJA" or the "Act"), which eliminated the deduction for entertainment expenses effective 1/1/2018.
Prior to the Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer, on the employer’s business premises, were 100% deductible by the employer and tax-free to the recipient employee.
As we noted then, the Act created uncertainty whether client business meals would be treated as a form of nondeductible entertainment going forward. This recent clarification provided by the IRS is welcome news for taxpayers with significant business meal expenditures.
Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
The expense is not lavish or extravagant under the circumstances;
The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
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 the entertainment on one or more bills, invoices, or receipts.
The IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.
The IRS plans to issue proposed regulations and is requesting comments by Dec. 2 on the notice. In the meantime, taxpayers can rely on this information to plan for their 2018 year-end tax returns. As always, the Restivo Monacelli team will keep you updated with news and information.
If you would like to discuss how these changes affect your particular situation, and any strategic planning moves you should consider, please give us a call at 401-273-7600.