Submitted by: Jennifer Dizon, CPA, Hood & Strong LLP
Before the The Tax Cuts and Jobs Act (TCJA), the Internal Revenue Code (IRC) generally prohibited deductions for expenses related to entertainment, amusement or recreation (commonly referred to as entertainment expenses). It provided exceptions for entertainment expenses “directly related” to or “associated” with conducting business.
The IRC further limited deductions for food and beverage expenses that satisfied one of the exceptions. A deduction was allowed only if 1) the expense wasn’t lavish or extravagant under the circumstances, and 2) the taxpayer (or an employee of the taxpayer) was present when the food or beverages were furnished. The amount of the deduction was limited to 50% of the expense.
The new law repeals the two exceptions and amends the 50% limitation to remove the reference to entertainment expenses. The TCJA doesn’t address the circumstances in which providing food and beverages might constitute nondeductible entertainment, but legislative history “clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.”<
Deductible requirements:
Until the IRS publishes its proposed regulations, businesses may deduct 50% of business meal amounts if:
- The expenses are ordinary and necessary expenditures paid or incurred to carry on business,
- The expenses aren’t lavish or extravagant under the circumstances,
- The taxpayer (or an employee of the taxpayer) is present at the furnishing of the food or beverages,
- The food and beverages are provided to current or potential customers, clients, consultants or similar business contacts, and
- For food and beverages provided during or at an entertainment activity, the entertainment is purchased separately from the food and beverages 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 guidance includes illustrative examples for the fifth criterion:
In the first example, a taxpayer invites a business contact to a baseball game, paying for both tickets. While at the game, the taxpayer also pays for hot dogs and drinks. The game is entertainment, so the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and drinks, purchased separately from the tickets, isn’t an entertainment expense. Therefore, the taxpayer can deduct 50% of the cost as a meal expense.
The second example employs a similar scenario, with the taxpayer inviting a contact to a basketball game. This time, though, the taxpayer buys tickets to watch the game from a suite, with access to food and beverages included. The game again represents entertainment, and the cost of the tickets is nondeductible. The cost of the food and beverages isn’t stated separately on the invoice, rendering it a disallowed entertainment expense, as well.
The final example uses the scenario above, except that the cost of the food and beverages is stated separately on the invoice for the basketball game tickets. The cost of the tickets remains nondeductible, but the taxpayer can deduct 50% of the cost of the food and beverages.
Nondeductible entertainment
- Night clubs,
- Cocktail lounges,
- Theaters,
- Country clubs,
- Golf and athletic clubs, and
- Sporting events.
Entertainment also includes hunting, fishing, vacation and similar trips. It may include providing food and beverages, a hotel suite or an automobile to a customer or the customer’s family.
Be sure to contact your tax advisor for how these rules apply to your situation.