On September 30, 2020, IRS released final regulations providing guidance related to the deductibility of meals and entertainment expenses under Section 274 of the Internal Revenue Code. These final regulations clarify several areas of Section 274 that were impacted by changes under the 2017 Tax Cuts and Jobs Act (TCJA). Except for a few small modifications, the final regulations substantially adopted the guidance in the proposed regulations (released in February 2020).
TCJA Background
As part of the tax reform under TCJA, deductions of any expenses related to activities considered entertainment, recreation or amusement were eliminated. Furthermore, the deductibility of food and beverage (meal) costs became much more restrictive, with many costs that were previously deductible at 100% now being limited to the 50% deduction like other types of meal costs. However, there was some lack of clarity regarding how to determine what costs are considered entertainment, and how food and beverage costs related to entertainment activities should be handled.
The final regulations provide clarification on these areas, and they provide additional guidance on criteria that should be met for any food and beverage costs to be deducted at 50%.
Highlights
- The final regulations confirm that there are nine exceptions to expenses that otherwise might be considered entertainment and be completely nondeductible, and they are as follows:
- Food/beverages for employees served on the business premises
- Expenses for services, goods and facilities treated as wages (however, if recipient is a certain individual such as an officer, director, or 10% shareholder (or related person), the employer’s deduction is limited to the amount of compensation reported)
- Reimbursed expenses
- Recreational expenses primarily for non-highly compensated employees
- Expenses of business meetings for employees, stockholders, agents, or directors
- Expenses necessary for attending a business meeting of a tax-exempt business league (like a chamber of commerce or a board of trade)
- Expenses for goods, services, and facilities available to the public
- Expenses for entertainment sold to customers for appropriate consideration
- Expenses incurred in providing entertainment to a non-employee, if included in the recipient’s income
- The final regulations clarify and confirm that the only food and beverage expenses excluded from the 50% deduction limitation are recreational employee meals (like those served at a holiday party or employee picnic) or meals provided to the public to generate business (like an open house). Meals provided to an employee at work continue to qualify for only 50% deduction (was 100% pre-TCJA).
- The final regulations confirm that to be able to deduct 50% of food and beverage costs, the following criteria must be met:
- The expense must be ordinary and necessary to the business
- The expense should not be lavish or extravagant, and must be provided when an employee/taxpayer is present
- The food or beverage must be provided to a current or potential business client, customer, consultant, or similar
- Food and beverages provided as part of an entertainment activity must be purchased separately, or the costs must be separately-stated from the entertainment activity itself on the receipt or bill (if not, those costs are also considered entertainment costs and therefore are not deductible at all)
- The final regulations also clarify that food or beverage expenses at an eating facility for employer-provided meals do not include expenses related to the operation of the facility (salaries of those preparing/serving the meals, and other overhead costs)
If you have questions about deductibility of meals and entertainment in your business, feel free to reach out to us any time.