The IRS today released an advance version of Notice 2018-76 as guidance on the deductibility of expenses for certain business meals under section 274 as amended by the new U.S. tax law.
Notice 2018-76 [PDF 35 KB] explains that the new tax law (Pub. L. No. 115-97, enacted December 22, 2017) amended section 274 to generally disallow a deduction for expenses for entertainment, amusement, or recreation. The new tax law, however, did not specifically address the deductibility of expenses for business meals.
Notice 2018-76 provides:
The new tax law repealed deductions for entertainment, amusement, and recreation—even when directly related to the conduct of the taxpayer’s trade or business. The 50% deduction limitation for food and beverage expenses associated with a trade or business is generally retained.
There has been uncertainty as to whether the meals provided during an entertainment event fall under the meal or entertainment deduction limit (for example, a meal in connection with a business client at a ballgame).
Today’s IRS notice first explains that the new tax law did not change the definition of “entertainment” under section 274(a)(1). Thus, the regulations that define entertainment continue to apply.
Next, Notice 2018-76 explains that while the new tax law did not address the circumstances when the provision of food and beverages might constitute entertainment, the legislative history clarifies that taxpayers may continue to deduct 50% of the food and beverage expenses associated with operating a trade or business.
When issued, the proposed regulations will (according to the IRS notice) clarify when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible expenses. Under Notice 2018-76, taxpayers may deduct 50% of an otherwise allowable business meal if:
The notice states that the entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Notice 2018-76 includes three examples to illustrate the application of this guidance. The examples highlight the need 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.
Comments about the future proposed regulations are requested, and are due by December 2, 2018. The IRS has specifically requested comments concerning:
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