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Benefits

Proposed Regulations Clarify Meal and Entertainment Deduction Limitations After Tax Cuts and Jobs Act

EBIA  

EBIA  

Meals and Entertainment Expenses Under Section 274, 26 CFR Part 1, 85 Fed. Reg. 11020 (Feb. 26, 2020)

Proposed Regulations

News Release

The IRS has issued proposed regulations on business deductions for meals and entertainment, reflecting changes made by the Tax Cuts and Jobs Act (TCJA). As background, employers can generally claim deductions for fringe benefit expenses that qualify as ordinary and necessary business expenses, subject to additional rules for specified expenses. Effective after 2017, the TCJA eliminated deductions for entertainment expenses and limited deductions for certain meals (see our Checkpoint article). The proposed regulations provide guidance regarding whether an activity is considered entertainment and comprehensive rules for food and beverage expense deductions.

  • Entertainment Expenses. The TCJA eliminated provisions that allowed a partial deduction for entertainment expenses sufficiently related to or associated with the active conduct of the taxpayer’s business. The proposed regulations define “entertainment” and prescribe an objective test for determining whether an activity constitutes entertainment, considering the relevant business. Food and beverages provided at an entertainment activity would be treated as part of the entertainment (and thus not deductible) unless the food and beverage expenses are separately paid or billed, in which case they may be deductible subject to applicable limitations. Simply allocating an amount to food and beverages is not permitted. Illustrative examples are provided.
  • Meal Expenses. Up to 50% of food and beverage expenses may be deducted so long as the expense is not lavish or extravagant; the meal is provided to a current or potential customer, client, or other business contact; and the taxpayer (or an employee) is present. Again, examples are provided. Travel meal expenses for employees (but generally not spouses or dependents) would be deductible subject to the 50% limitation and substantiation requirements. The proposed regulations also address the deductibility of meal expenses incurred in other specified circumstances, including food and beverages provided to employees at recreational activities, and consumption by employees of food and beverages offered to the general public.

EBIA Comment: Although the proposed regulations are not effective until finalized, taxpayers can rely on them for expenses incurred after December 31, 2017—the effective date of the applicable TCJA provisions. The proposed regulations largely follow previously issued interim guidance (Notice 2018-76), but they do add some clarifications that are of interest from a fringe benefits perspective because the extent to which an employer can deduct an expense may affect its decisions regarding which employee business expenses to pay or reimburse as fringe benefits. For more information, see EBIA’s Fringe Benefits manual at Sections II.B (“How Are Fringe Benefits Treated for Income Tax Purposes?”), VII.G (“De Minimis Fringe Benefits: Employer Deduction”), and XVI (“Employer-Provided Meals”).

Contributing Editors: EBIA Staff.

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