Proposed Regs Maintain Deductibility of Business Meals
On February 21, 2020, the IRS issued proposed regulations providing guidance clarifying amendments made by the 2017 Tax Cuts and Jobs Act (TCJA) pertaining to Internal Revenue Code (IRC) §274 expenses, i.e. “meals and entertainment” expenses. Most importantly, the proposed regulations clarify that TCJA did not amend the rules relating to deducting business meals. Taxpayers who pay or incur meals or entertainment expenses are encouraged to consult with a tax professional about how these proposed regulations could affect them.
Most importantly, the proposed regulations address the deductibility of business meals, which was a source of confusion for the business community after TCJA. The proposed regulations explain that TCJA did not amend the rules relating to deducting business meals. Thus, generally, taxpayers may still deduct 50% of the food and beverage expenses associated with conducting their trade or business. The proposed regulations state that they substantially incorporate the guidance provided earlier in Notice 2018-76.
Under the proposed rules, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an IRC §162(a) ordinary and necessary business paid or incurred during the tax year when conducting any trade or business;
- The expense is neither lavish nor extravagant under the circumstances (just as was the case before TCJA);
- The taxpayer or taxpayer’s employee is present when the food and beverages are furnished (also as required before TCJA);
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they are purchased apart from the entertainment, or their cost is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Note that this includes employee meals consumed during work travel. Consider the following example:
T, a dentist, traveled from Baltimore to Chicago to attend a five-day dental course. The cost of the course is deductible as an educational expense. T arrived in Illinois on Sunday and attended course events all day Monday through Friday. On the following Saturday and Sunday, T drove outside of Chicago to spend the weekend with a relative. T returned to Baltimore on Sunday afternoon. Considering the time that T spent on educational courses and personal activities, T’s trip to Chicago was primarily to obtain education. Therfore, T’s travel expenses are deductible (excluding the expenses incurred during his weekend visit with a relative). T spent $500 for air fare, $800 for lodging, and $250 for food and beverages-all of these unrelated to his visit with his relative. The $250 for food and beverages, attributable to the educational courses, is deductible for travel incident to deductible education. The amount T is allowed to deduct is $125 ($250 × 50% limitation). All of the other business travel expenses are fully deductible (with substantiation).
Conclusion
The IRS indicates that, until the regulations are finalized, taxpayers may rely on the guidance provided under Notice 2018-76. With this in mind, businesses should meet soon with a tax professional to re-evaluate their current expense system and make any modifications necessary to ensure that it is not missing out on any opportunities under these proposed regulations.
If you have questions or concerns about meals or entertainment expenses, contact Frost Law today at 410-497-5947.
REG-100814-19, 85 Fed. Reg. 11,020 (Feb. 26, 2020).
Prop. Reg. §1.274-12(a)(4), REG- 100814- 19, 85 Fed. Reg. 11,020 (Feb. 26, 2020).
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