Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers were able to deduct fifty percent of the cost of meal expenses and entertainment expenses provided certain requirements were met. As a result of the TCJA, entertainment expenses are no longer deductible. The issue presented for taxpayers has now become whether the provision of food and beverages might constitute entertainment.
Fortunately for taxpayers, the IRS recently provided guidance to help taxpayers determine whether they may deduct meal expenses. Under Notice 2018-76, taxpayers may deduct fifty percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under section 162(a) paid or incurred during the taxable year in carrying on a trade or business;
- The expense is not 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 a current or potential business customer, client, consultant, or similar business contact; and
- 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.
Accordingly, if a taxpayer invites a business contact to a baseball game, purchases the tickets to the game, and buys the contact a hotdog and beverage, the taxpayer cannot deduct the cost of the tickets but may deduct fifty percent of the cost of the hotdog and beverage provided the cost of the hotdog and beverage are purchased separately from the tickets. But, if the hotdog and beverage were included in the price of the tickets (and not separately itemized on the invoice for the tickets), under Notice 2018-19, the taxpayer would not be entitled to deduct any portion of the total amount paid for the tickets and concessions.
This information is written by Attorney Blake D. Lewis who is an associate in the firm’s Mergers and Acquisitions Practice Group at Friday, Eldredge & Clark, LLP. Blake's practice focuses on taxation, mergers and acquisitions, real estate transactions, tax controversies, entity formation and governance, and franchising.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our Mergers and Acquisitions Attorneys.