IRS rules business meals are still deductible after TCJA changes

The IRS appears to have resolved an ongoing controversy over business meals remaining deductible following the passage of the Tax Cuts and Jobs Act changes in late December 2017. In Notice 2018-76 issued on October 3, 2018, the Service announced its intention to publish proposed regulation which will include guidance on the deductibility on certain business meals. In the Notice, the Service ruled that taxpayers may rely upon the guidance in the notice for their treatment of business meals for deductibility purposes.

For a business meal to be deductible, it’s expense must be ordinary and necessary. Additionally, the expense must not be lavish or extravagant, and the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food and beverages. If these criteria are met, the deduction is limited to fifty percent of the cost.

Prior to the TCJA, an additional requirement existed – the food and beverage expense was required to be “related to the active conduct of the taxpayer’s trade or business” or “associated with the active conduct of the taxpayer’s trade or business” in the case of an item “directly preceding or following a substantial and bona fide business discussion.” Only expenses meeting one of these two criteria were eligible for the deduction, as the expenses constituted “entertainment” under the Internal Revenue Code.

The TCJA removed these two criteria and disallowed any expenses for “entertainment.” As such, experts and commentators disagreed as to whether business meals would be disallowed because they would be considered entertainment, or whether they continued to remain deductible based upon statements contained in a Congressional committee report stating that such items would remain deductible.

For now, the IRS has ruled that it will consider expenses for business meals to be deductible, if the following criteria are met, pending the issuance of final regulations:

1. The expense is an ordinary and necessary expense under §162(a) paid or incurred during the taxable year in carrying on any trade or business;
2. The expense is not lavish or extravagant under the circumstances;
3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
5. 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. The Notice further provides that the entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

In tax cases, courts have come to differing conclusions on the amount of weight to afford pronouncements of the Internal Revenue Service, so the final answer will likely come in the form of final regulations once published by the Treasury Department. For now, however, taxpayers should rely upon this interim guidance for determining when business meals are deductible.

If you have any questions about business meals or any other tax topic, contact Brett Bissonnette, JD, CPA, or any of the other experienced tax professionals of Clark Schaefer Hackett at (937) 226-0070.