IRS Releases Final Rules on Business Meals and Entertainment

On September 30, 2020, the IRS finalized and implemented the final regulations for the Tax Cuts and Jobs Act of 2017. The TCJA disables business deductions for expenses incurred under entertainment purposes. Furthermore, the TCJA outlines the process for business deductions for food and beverages and how it differs from that of entertainment deductions. Generally, food and beverages deductions permit up to 50% of authorized expenses.

Sec. 274(a)(1)(A) states that activities labeled entertainment, amusement, or recreation are usually denied deductions. Prior to Dec. 31, 2017, the TCJA granted a few exceptions, including entertainment either preceding or following a legitimate business interaction or discussion.

Despite new provisions, the following exceptions remain active under Secs. 274(e)(1) through (9):

  • Certain recreational activities for the benefit of employees
  • Reimbursement for expenses incurred
  • Entertainment as compensation

 

IRS Entertainment Deductions

However, the TCJA eliminated entertainment from Sec. 274(n)(1) that states the 50% limit on food and beverage deductions. Aside from the deletion of entertainment deductions, the provision remains as is. Additionally, Sec. 274(k) demands that food and beverage expenses are not extravagant. Also, either the taxpayer or employee is attendant when served. Given Sec. 162(a), food and beverages are a necessary business expense.

Sec. 132(e) clarifies that de minimis fringe benefits are also subject to the 50% limitation on food and beverages.
Ultimately, it is necessary for business taxpayers to abstract their deductible meal expenses from entertainment expenses that are nondeductible moving forward.

The final regulations surrounding entertainment deductions under Sec. 274(a) state that the food or beverage must be given to “a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner or professional adviser, whether established or prospective.”

Under the current and final regulation using the above definition, the employees are seen as a type of business associate when an employer-provided food or beverage expense occurs. This also applies to the deduction for taxpayer-provided meal expenses to both employees and non-employee business associates at the same event.

These regulations are effective upon publication in the Federal Register. If you would like help maneuvering the corporate tax landscape, please contact Zetter HealthCare or call us at (717) 691-6768.