IRS Issues Guidance on Meals and Entertainment Deductions Under Tax Reform
By R. Michael Sorrells CPA
On October 3rd the Internal Revenue Service issued Notice 2018-76 providing transitional guidance on the business expense deduction for meals and entertainment expenses related to the tax law changes of the Tax Cuts and Jobs Act (the Act). The notice also announces that the IRS and Department of Treasury intend to publish proposed regulations in this area. The guidance in Notice 2018-76 can be relied upon until the proposed regulations are published.
For nonprofit organizations, this would primarily affect only taxable activities; for example, meal/entertainment expenses related to unrelated business income activities or to such expenses on tax returns prepared for subsidiary entities such as taxable corporations or passthrough entities such as partnerships.
Before the Act, both meals and entertainment were deductible, but limited to 50%.
The Act modified Internal Revenue Code Section 274 and eliminated the deduction for any expenses generally considered to be entertainment, amusement or recreation. Taxpayers may continue to deduct 50% of meal expenses but can take no deduction for entertainment.
Deductions for meals considered to be lavish or extravagant will not be allowed and the taxpayer or his/her employee must be present. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
“Entertainment” as defined in Section 274 means any activity considered to constitute entertainment, amusement or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, athletic clubs, sporting events and hunting, fishing vacations and similar trips. However, the business of the taxpayer can be considered in determination of whether the entertainment is deductible. For example, someone in the business of producing musical comedies who takes potential backers to a musical theatrical production would not have to entirely exclude the ticket expense as entertainment.
If a meal is provided at an entertainment event, then the food will be subject to the 50% limitation, but the cost of the event tickets will not be deductible at all. If the ticket price includes food (a sky suite for example), then all of the expense will be considered non-deductible entertainment.
The IRS and Treasury Department are inviting comments for future guidance in this area. Any such comments should be submitted by December 2, 2018.
Please contact us if you have any questions or need assistance in this area.