On October 3, 2018, the IRS released additional (post Tax Cuts and Jobs Act) guidance in Notice 2018-76 regarding expenses for business meals. The notice announces that the Department of the Treasury and the IRS intend to publish proposed regulations, which will include guidance on the deductibility of expenses for certain business meals. Until the proposed regulations are effective, employers may rely on the IRS guidance in Notice 2018-76.
Summary:
The IRS Notice re-visits the fact that the Tax Cuts and Jobs Act essentially removed business deductions for entertainment, amusement, or recreation expenses. What the Tax Cuts and Jobs Act failed to do was address particular situations in which “food and beverage expenses” might constitute entertainment, thus making them non-deductible expenses under the new law. The recent IRS notice states that until further guidance is issued, taxpayers may deduct 50 percent of an otherwise allowable “business meal” expense, as long as the following is true:
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 entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Finally, employers should also note that the business deduction for operation of an on-premises facility, including cost of food and beverages furnished for employees and meals provided for the convenience of the employer, will be completely nondeductible after 2025, unless changed again by future legislation.
Employer Action Items:
- Employers should review Notice 2018-76 and should direct any specific questions regarding business meal deductions to their tax professional.
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