The IRS issued final regulations implementing provisions of the TCJA which disallow a business deduction for most entertainment expenses. The IRS clarified the treatment of business deductions for food and beverages that remain deductible, generally limited to 50% of qualifying expenditures, and how taxpayers may distinguish those expenditures from entertainment.
ENTERTAINMENT
The final regulations generally kept the existing definition of entertainment and confirm the nine exceptions to entertainment expenses, which include:
2. Expenses for services, goods and facilities treated as compensation and as wages for withholding tax purposes, but if the recipient is a specified individual such as an officer, director or 10% shareholder or related person, the employer’s deduction is limited to the compensation reported.
3. Reimbursed expenses, but only:
b) If the services are performed for a person other than an employer and the taxpayer incurring the reimbursed expenses accounts to that person.
5. Expenses of employees’, stockholders’, agents’ or directors’ business meetings.
6. Expenses directly related and necessary to attendance at a business meeting of a tax-exempt business league, including a real estate board, chamber of commerce or board of trade.
7. Expenses for goods, services and facilities made available to the public.
8. Expenses for entertainment sold to customers in a bona fide transaction for adequate consideration.
9. Expenses for goods, services and facilities furnished to a nonemployee as entertainment, amusement or recreation and are includible in the recipient’s income as compensation for services or as a taxable prize or award.
FOOD AND BEVERAGE
The final regulations apply the guidance in the proposed regulations to food and beverage expenses allowing taxpayers to deduct 50% of business meal expenses if it can meet the following criteria:
• It is not lavish or extravagant, and an employee/taxpayer is present when the food or beverage is furnished.
• The food or beverage is provided to a current or potential business customer, client, consultant or similar business contact.
• Any food and beverages provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.
The final regulations generally apply the guidance to all food or beverages, including travel meals and employer-provided meals, as well as food and beverages provided at or during an entertainment activity. The deduction limitation rules generally apply to all food and beverage, whether characterized as meals, snacks or other type of food.
The final regulations adopt the interpretations that a restaurant or catering business may continue to deduct 100% of its costs for food or beverage items, purchased in connection with preparing and providing meals to its paying customers, which are also consumed at the worksite by employees who work in the employer’s restaurant or catering business. The regulations retain the examples on the application of this rule, including meals for camp counselors eating with campers, real estate agents providing food during open houses and auto service centers providing food to customers waiting for their cars to be serviced.
Furthermore, food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs.
Reach Out To Us: Meals and entertainment play a critical role in networking and business generation activities for most businesses. It is important to understand the rules to avoid lost tax savings. Let our tax professionals help you get the deductions right, and be sure you are maximizing the opportunities which still exist under the guidance. Reach us at CPA@fuoco.com.
