Final Tax Regulations on Entertainment and Meals as Business Deductions

by Scott Lewis, CPA, MSA

On October 2, 2020, the IRS issued their final regulations on the deductibility of business entertainment and food and beverage expenses. As part of the Tax Cuts and Jobs Act (TCJA) in late 2017, IRC Section 274, “Disallowance of certain entertainment, etc.,” was significantly modified. It effectively eliminated the tax deductible expense of most entertainment expenses for business purposes and changed the rules for the deductibility on business meals, food and beverages. These final rules are effective for tax years that begin on or after October 2, 2020. We want to bring to your attention how the final regulations have clarified some of their guidelines.

Entertainment expenses

Prior to the TCJA, business expenses considered entertainment, amusement or recreation expenses were generally limited to a 50% tax deduction. The TCJA changed the character of these expenses to disallow these expenses at 100%. Within the tax regulations, and drafted very broadly, the term “entertainment” is defined as meaning any activity generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family. There are nine exceptions to this code section for these entertainment type expenses for them to be considered fully tax deductible.

  1. Expenses for food and beverages including facilities furnished on the business premises of the taxpayer primarily for employees.
  2. Treated as compensation.
  3. Reimbursement program.
  4. Recreation use for employees primarily for their benefit.
  5. Business meetings.
  6. Meetings of standard non-profits as well as business leagues such as chamber of commerce and other entities set up to monitor these activities.
  7. Items available to the public.
  8. Entertainment sold to the public in the ordinary course of business.
  9. Expenses includible in income of non-employees as compensation of prize/awards.

Business meals, food and beverages

Limitations on meals, as before the TCJA are still eligible for the 50% deduction. If they occur at an entertainment event, such as a sporting event, as long the receipts are clearly identified, and they are not considered inflated in value, they are eligible for the 50% deduction. If they cannot be separated, nothing can be deducted.

Other regulations that were incorporated state that meals cannot be lavish or extravagant and the taxpayer or an employee must be present, specifically when food is served. Final regulations also specify that these meals must be part of the active conduct of the taxpayer trade or business, such as involving customers, suppliers, professional advisers (such as your CPA), or employees. These rules apply for travel meals as well.

Exceptions which are overlapping from entertainment above, that will allow these food and beverage type expenses to be considered tax deductible are:

    1. Treated as compensation
    2. Reimbursement program
    3. Food and beverage during recreation use for employees primarily for their benefit
    4. Items available to the general public
    5. Sold to the public in the ordinary course of business
    6. Expenses includible in income of non-employees as compensation of prize/awards.

We want to emphasize that de minimis fringe employee benefits (such as employee lunches, other food or beverages in a break room or provided for the convenience of the employer) are now subject to the 50% limitation.

The final regulations added several examples to clarify some of the above. We strongly suggest that taxpayers keep very detailed records tracking all these types of expenditures, to ensure tax deductibility as appropriate. Many of these should be looked at from an objective standpoint to determine whether deductible or not. The IRS looks at these as “low hanging fruit” as they conduct their audits.

If you have any questions on how this impacts you or your business, please click HERE to contact us.

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