Prior to the change made by the 2017 Tax Act, taxpayers could deduct up to 50 percent of entertainment expenditures if these were related to business activity (e.g., business discussions were held) and were not lavish. Similarly, prior rules (Sec. 50% of the amount that otherwise could have been deductible.
The IRS released written guidance last week (Notice 2018-76) to clarify that taxpayers generally may continue to deduct 50% of the food and beverage expenses incurred in their trade or business. The assistance mentioned that Treasury Department and the IRS intend to publish proposed regulations clarifying when business meals are nondeductible entertainment expenditures and when they may be 50% deductible as business expenses.
Notice 2018-76 includes three examples to illustrate the use of this guidance. The examples highlight the necessity to have food and beverage expenses either paid separately from entertainment costs or on an invoice that separately states the costs of food and beverages. In Example 1, a taxpayer invites a business contact to a football game. The taxpayer purchases tickets for the game. While at the overall game, the taxpayer buys hot dogs and beverages individually. Although the overall game tickets are not deductible, the hot dogs and drinks are deductible, subject to the 50% deduction disallowance. In Example 2, the taxpayer invites a business contact to attend a golf ball game.
The taxpayer buys tickets for chairs in a suite, which include drinks and food. The invoice for the tickets says that drinks and food are included in the ticket price. As the invoice does not separately provide the cost for food and beverages, the entire cost of the ticket is nondeductible.
Example 3 gets the same facts as Example 2, except that the invoice for the suite tickets separately states the price of food and beverages. Because the food and beverage amount is provided on the invoice separately, the expense of food and beverage is subject to a 50% deduction, as the entertainment portion is disallowed. The IRS stated in the announcement that the entertainment disallowance guideline may not be circumvented through inflating the amount charged for food and drinks.
Jim Markwood is an accomplished tax lawyer with experience dealing with corporate and business and private equity clients, partnerships and business owners to optimize the taxes effects of their business decisions. He has extensive knowledge in a wide range of tax matters including federal, state and international tax issues. Click here to find out more about Jim and his practice.
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