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IRS Floats Updated Regs on Business Meals, Entertainment

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The Internal Revenue Service on Monday issued proposed regulations on the business expense deduction for meals and entertainment following changes made by the 2017 tax overhaul.

The 2017 Tax Cuts and Jobs Act eliminated deductions for business entertainment expenses, explained Andrew Friedman, founder and principal at The Washington Update. “When Congress passed the Act, it was unclear whether the disallowance applied to business meal expenses,” he told ThinkAdvisor in a Monday email message.

In October 2018, the IRS issued a notice giving temporary guidance on this issue. The proposed rules would make those provisions permanent, Friedman says.

The notice, according to Friedman, “states that the cost of food purchased for business reasons without an entertainment component (for example a restaurant dinner or a buffet offered at a client seminar) is not subject to the entertainment disallowance. Thus, the costs of standalone meals are deductible, subject to the 50% reduction in meal expense deductions that remains in effect from prior law.”

The 2018 notice said that the cost of food purchased as part of or during an entertainment activity remained 50% deductible if (i) the food and beverages were purchased separately from the entertainment, or (2) the cost of the food and beverages was stated separately from the cost of the entertainment on bills or receipts.

The proposed reg update issued Monday is important for financial advisors, Friedman said.

“For example, suppose an FA purchases a ticket to take a client to a baseball game. During the game, the FA buys the client a beer. Because the beer is purchased separately from the ticket, the FA (or the FA’s employer) may deduct the cost of the beer (but not the cost of the ticket),” Friedman said. “Suppose instead the FA takes the client to a luxury box, where food is provided without additional charge. In that case the food is part of the entertainment expense and not deductible, unless the FA receives a separate invoice for the food cost apart from the cost of the luxury box.”

The new proposal also lays out some less important guidance around the tax treatment of entertainment and meal expenses, Friedman points out.

The 2017 tax law eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. It also limited the deduction for expenses related to food and beverages provided by employers to their employees.

IRS is taking comments on the proposed regulations, and will hold a public hearing on them on April 7.

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