The Tax Cuts and Jobs Act of 2017 (the “TCJA”) removed the 50% deduction for all expenses related to entertainment, entertainment or leisure activities. However, taxpayers can still deduct business expenses related to food and drink if certain conditions are met. On September 30, 2020, the IRS issued final settlement which implement the 2017 legislation and largely follow, with some clarification, the draft regulation published in February 2020 and the guidelines of Opinion 2018-76, as revised in the draft regulation.
Here are some of the highlights of the final settlement:
- When provided in conjunction with an entertainment activity, the final rule confirms that no expense can be allocated to an otherwise qualifying food or beverage expense (and the full amount is treated as a non-deductible entertainment expense) to unless (i) the food or drink provided to or during an entertainment activity is purchased separately from the entertainment, or (ii) the cost of the food or drink is shown separately from the cost of the entertainment on one or more invoices, invoices or received. The final rule, however, clarifies this requirement by adding that the amount charged for food or drink should reflect the venue’s usual cost of sale for those items if they were to be purchased separately from the entertainment, or should approximate the reasonable value of these articles. This clarification prevents taxpayers from inflating food and beverage costs to qualify for the potential deduction.
- The final rule confirms the continued application of exceptions to entertainment expenses otherwise denied under the general rule, including (i) expenses that are treated as compensation for the beneficiary (for example, the employer rewards the employee and spouse with paid vacation), (ii) expenses for recreational, social or similar activities for employees (for example, holiday season, summer outings) and (iii) expenses for goods , services and facilities available to the general public (for example, the company offers complementary coffee in its reception area).
- In cases where the food or drink provided to or during an entertainment activity is not purchased separately from the entertainment, and the cost of the food or drink is not shown separately from the cost of the entertainment on one or more invoices , or receipts, no allowance can be made and the entire amount is a non-deductible entertainment expense.
- The no-entertainment rule applies whether the expense for the activity is connected with or associated with the active conduct of the taxpayer’s trade or business.
- An “objective test” is applied to determine whether an activity is of a type generally considered to be entertainment.
Eligible business meal expenses
The final rule confirms that business meal expenses must not be lavish or extravagant under the circumstances and that the taxpayer, or an employee of the taxpayer, must be present when the food or drink is provided.
The final regulations confirm that the food or drink must be supplied to “a person with whom the taxpayer can reasonably be expected to engage or actively engage in the business or business of the taxpayer, such as the taxpayer.
client, client, supplier, employee, agent, partner or professional advisor, whether established or potential.
Accordingly, this definition considers employees a type of business associate and allows the deduction for meals provided by the taxpayer to employees and non-employee business associates at the same event.
The final rule makes it clear that the final rule is intended to provide comprehensive rules for food and drink expenses and therefore also applies to travel meals.
The exception to the 50 percent limit on expenditure on food and drink made available to the general public also applies to expenditure on food and drink supplied to employees only if the employer reasonably expects it to do so. that more than 50 percent of refreshments are consumed by customers, customers and visitors.
The definition of “food and beverage expense” includes all delivery charges, tips and sales tax, but does not include the cost of transportation to the meal.
To help taxpayers apply the above rules, the final regulation also provides a number of examples to address specific factual scenarios, including:
- Food or beverages provided to food service workers who consume the food or beverages while working in a restaurant or catering business;
- The distribution of expenses for tickets, food and drinks when participating in a sporting event with an associate;
- Food or drinks provided at company parties and picnics;
- Food or drinks provided to employees in a company cafeteria at a reduced or free price;
- Snacks available to employees in a pantry, break room or copy room; and
- Refreshments that are offered in a company waiting room when the refreshments are consumed by both employees and customers (i.e. the general public).
The final rule provides useful guidance and clarification to assist taxpayers in determining whether an activity should be considered a non-deductible entertainment, entertainment or leisure activity or a deductible business meal expense after complete elimination. any deduction for the costs associated with these activities. While the cost of a stand-alone business meal (for example, a client dinner) continues to be 50% deductible, taxpayers who provide business meals as part of entertainment activities should require that the cost of the meal is shown separately from the cost of the entertainment on any bill. Businesses that have not already done so based on the proposed regulation and Notice 2018-76 should also review their documentation regarding previously incurred business meals and entertainment expenses to ensure that the documentation can justify a division of these expenses. If not, it may be possible to obtain revised documentation from the vendor that separately identifies the cost of the business meal and entertainment expenses. Justification and invoicing of a separate cost for business meals provided as part of entertainment activities will be essential to ensure that meal expenses remain partially deductible. Failure to do so is a trap for the unwary.
The final regulations come into effect on October 9, 2020.