2018 Tax Updates: Part III - Meals & Entertainment Deductions under the TCJA

​This is the third article in a four part series of articles about the 2018 tax law changes and how they will affect individual and business returns filed in 2019. You can access the first article, General Changes to Individual Returns, here, and the second article, The New QBI Deduction for S-Corporations and Other Pass-Through Entities, here.

The IRS recently issued a notice regarding transitional guidance about coming proposed regulations dealing with legislative changes under the 2017 Tax Cuts and Jobs Act (TCJA). This guidance specifically addresses the elimination of the entertainment expense deduction, while at the same time clarifying treatment of certain business meal expenses. 
 
Prior to the TCJA, business taxpayers could deduct 50% of business meals AND 50% of business entertainment, provided the meals and entertainment expenses met certain qualifications and were directly related to the active conduct of the taxpayer’s trade or business.
 
Fast forward to current law. The new law DISALLOWS "a deduction for any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation."
 
Entertainment expenditures (whether business related or not) are no longer deductible. However, after the passage of the TCJA there were many questions in the tax community about the continued deductibility of certain business meals and how that would interact with the elimination of entertainment deductions. Responding to requests for guidance on the issue, the IRS recently issued a notice that clarifies the issue. (If you would like to read the full notice you can do so here.)
 
Under this notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:  

1. The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
2. The expense is not lavish or extravagant under the circumstances;
3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages 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 entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.  ​

Various examples are given by the IRS of specific situations and how the new law will apply. One of them is very common and illustrates the issue well:
 
Business Taxpayer A takes Client B to a baseball game and buys both the tickets to the game, and food and drinks while at the game. Under the new law Taxpayer A will no longer be able to deduct any portion of the ticket price, since that constitutes entertainment, but would still be able to deduct 50% of the cost of food and drinks purchased (assuming the meal meets all the other requirements for deductibility and assuming it is separately stated from the ticket price on the receipt or invoice).
 
The main takeaways here are:

• Entertainment is non-deductible.  
• The IRS intends to issue proposed regulations and taxpayers can rely on their guidance in the notice until proposed regulations are set forth. However, that means we could have last minute changes or guidance in early 2019 that will affect your return.
• And, finally, remember to KEEP good records (as always) to distinguish between non-deductible entertainment and deductible meals. (Good records include a receipt, the date, notes about which business contact you were with, and notes about the general nature of the business discussions.)

This is general information and a brief summarization of complicated tax issues which are often subject to many exclusions and limitations. We make every effort to verify the accuracy of all information but we do not guarantee or warranty advice disseminated over the internet. Please give us a call to discuss potential strategies and ensure they make sense for your specific situation.