The IRS on September 29, 2020, posted on its website a version of final regulations (T.D. 9925) providing guidance under section 274 regarding changes made to section 274 by the U.S. tax law enacted in 2017 limiting the deductibility of meal and entertainment expenses.
The final regulations adopt the proposed regulations (February 2020) with minor modifications related to certain comments received.
One change to the final regulations addresses the use of the section 274(e)(2) and (e)(9) exceptions for meals included in employee and non-employee compensation, respectively. The proposed regulations provided that if less than the required amount was included in compensation, then the exception could not be used. The final regulations eliminate the “all or nothing approach” in this scenario (e.g., when there has been an error in value), but limit the section 274(e)(2) and (e)(9) exceptions to the amount included in compensation or reimbursed to the taxpayer.
The final regulations [PDF 317 KB] were released by the U.S. Treasury Department and IRS for publication in the Federal Register in the afternoon of October 2, 2020. The final regulations are effective for tax years that begin on or after October 9, 2020 (the date of publication in the Federal Register).
This report of initial impressions is based on the version of the final regulations [PDF 384 KB] released by the IRS.
The 2017 tax law (Pub. L. No. 115-97)—the law that is often referred to as the “Tax Cuts and Jobs Act” (TCJA)—eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. It also increased the scope of the deduction limitation for expenses related to food and beverages provided by employers.
The proposed regulations [PDF 309 KB] (February 2020) addressed the elimination of the deduction for expenditures related to entertainment, amusement or recreation activities and provided guidance to determine whether an activity is considered to be entertainment. The proposed regulations also addressed the limitation on the deduction of food and beverage expenses and the applicability of exceptions under section 274(e).
As noted briefly above, the final regulations substantially adopt the guidance in the proposed regulations with a few clarifications and additional examples in response to comments received.
The final regulations describe and clarify the statutory requirements of section 274(a), (k), and (n), as well as the applicability of certain exceptions under section 274(e) to food or beverage expenses. These final regulations address the changes made to deductions for meals and entertainment under the TCJA.
The final regulations add a new Reg. section 1.274-11 that:
Separately stated food or beverages, not entertainment
In addition, the final regulations retain the guidance in the proposed regulations that:
Business meal expenses
Concerning business meal expenses, the final regulations add a new Reg. section 1.274-12 that:
Example 3. Taxpayer E holds a business meeting at a hotel during which food and beverages are provided to attendees. Expenses for the business meeting, other than the cost of food and beverages, are not subject to the deduction limitations in section 274 and are deductible if they meet the requirements for deduction under section 162. Under section 274(k) and (n) and paragraph (a) of this section, E may deduct 50% of the food and beverage expenses.
Example 4. The facts are the same as in Example 3 (above), except that all the attendees of the meeting are employees of E. Expenses for the business meeting, other than the cost of food and beverages, are not subject to the deduction limitations in section 274 and are deductible if they meet the requirements for deduction under section 162. Under section 274(k) and (n) and paragraph (a) of this section, E may deduct 50% of the food and beverage expenses. The exception in section 274(e)(5) does not apply to food and beverage expenses under section 274(k) and (n).
Travel meal expenses
The final regulations:
Other food or beverage expenses
The final regulations also:
Section 274(e) exceptions to section 274(k) and (n)
Section 274(k)(2)(A) and (n)(2)(A) provide that the limitations on deductions in section 274(k)(1) and (n)(1), respectively, do not apply to any expense described in section 274(e)(2), (3), (4), (7), (8), and (9). The final regulations, therefore, provide that the deduction limitations are not applicable to expenditures for business meals, travel meals, or other food or beverages that fall within one of these exceptions.
As such, the final regulations provide guidance on:
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.