By: Patrick St. Clair
One of the less celebrated changes brought about by the Tax Cuts and Jobs Act (TCJA) was the removal of the entertainment portion of the meals and entertainment deduction. However, two big questions remained unanswered: how does the IRS define entertainment, and what happens when you combine meals & entertainment? The IRS just answered those questions for us this week, offering guidance and reinforcing what hasn’t changed in the post-TCJA world.
The IRS’s publication, “Notice 2018-76”, provided clarification that the definition and deductibility of meals has not changed under the TCJA, confirming that taxpayers may continue to deduct 50% for the meal expenses associated with operating their business (i.e. taking a client to lunch). Additionally, the new guidance stated that meals provided during (or in conjunction with) entertainment can still be treated as a 50% deductible expense provided that they met the following guidelines:
- The expense is not lavish or extravagant under the circumstances
- The Taxpayer, or an employee of the Taxpayer, is present
- The food & beverages are provided to current or potential business contacts (customers, clients, consultants, etc.)
- The food and beverages are purchased separately from the entertainment OR the cost of said items are stated separately from the cost of the entertainment on one or more bills, invoices, or receipts
Therefore, while you may no longer be able to deduct the cost of tickets to the ballpark, the cost of peanuts and cracker jacks bought separately are still a 50% deduction. An example of when the meal would not be deductible would be in the purchase of suite tickets where there is access to food and beverage. Since the food and beverage are not separately stated and rather included in the ticket price, and the event is entertainment, the entire cost is not deductible.
The IRS has also proactively stated that the entertainment disallowance can’t be avoided by inflating the amount charged for food and beverages. But those of us who have been to a recent sporting event know that stadiums already do a decent job of that for you.
In the notice, the IRS summarizes by stating that additional regulations on these changes are still forthcoming, but taxpayers can rely on the guidance that meals are still either 100% or 50% deductible under the same rationale as before and only entertainment is now non-deductible. The key will be the documentation of those expenses by the taxpayers.
Earlier in the year, we released two tax law guides to help you understand what the Tax Cuts and Jobs Act changed for businesses and individuals. You can find these here if you haven’t seen them already: What the Tax Cuts and Jobs Act means for you or your business. We also created a breakdown for employers in the area of meals and entertainment deductions.
As always, for specific questions on what they may mean for you, please reach out to us at email@example.com. One of our tax experts would be happy to assist.
PATRICK W. ST. CLAIR, CPA is a senior associate in the tax department of Ellin & Tucker and provides practical and technical tax compliance, planning and consulting for closely held businesses in several industries. He can be reached at firstname.lastname@example.org.