March 19, 2020 / North America
As many taxpayers progress through their first filing deadlines of the new decade, the IRS recently released proposed regulations (REG-100814-19, effective for taxable years beginning after December 31, 2017) providing additional meals and entertainment (“M&E”) guidance regarding M&E changes contained within the 2017 Tax Cuts and Jobs Act (“TCJA”, “the Act”). The proposed regulations contain two new sections – Prop. Reg. §1.274-11 and Prop. Reg. §1.274-12.Prop. Reg. §1.274-11 reinforces the language contained in Notice 2018-76 regarding the deductibility of “certain business meals” incurred as part of an otherwise nondeductible entertainment activity. Prop. Reg. §1.274-12 addresses food or beverage expenses under IRC Section 274(k) (business meals) and IRC §274(n) (meals deductibility). The proposed regulations also contain a number of examples illustrating these changes. While the proposed regulations provide useful clarification and confirmation in certain areas, many questions linger. This edition of Tax Advisor Weekly highlights specific guidance provided within the proposed regulations and recommends certain steps taxpayers can take to maximize their IRC §274 deductions for tax years 2019 and beyond.
“Entertainment” and the Food & Beverage Carveout
Prior to TCJA, taxpayers were allowed a 50 percent deduction for entertainment expenses (IRC §274(n)(1)) “directly related” to the taxpayer’s trade or business or those that involved a “substantial and bona fide business discussion” (IRC §274(a)(1)(A)). However, TCJA eliminated the “directly related” and ”business discussion” exceptions while removing the reference to entertainment expenses in IRC §274(n)(1).While the overarching IRC §274(a)(1) definition of “entertainment” still applies, Prop. Reg. §1.274-11 further defines the terms “entertainment” and “food and beverage.” The proposed regulations specifically acknowledge that “the term entertainment does not include food or beverages unless the food or beverages are provided during, or at, an entertainment activity.” Further, the proposed regulations note that an “objective test” should be applied when assessing whether or not an activity generally constitutes “entertainment.” Finally, the four examples within Prop. Reg. §1.274-11 are similar to those contained within Notice 2018-76. The examples identify scenarios where food and beverage expenses remain partially deductible even though they are incurred as part of a broader nondeductible client entertainment. Taxpayers can deduct 50 percent of such food and beverage expenses as long as these costs are separately stated on the invoice AND/OR they are purchased separately from the entertainment itself.
Definitions of Key M&E Terms
Prop. Reg. §1.274-12 addresses the limitations on deductions for certain types of food and beverage. Generally, food and beverage expenses remain 50 percent deductible so long as the following criteria are met: the expense is not “lavish or extravagant” under the circumstances, the taxpayer is present, and the food and beverage is provided to a business associate. These requirements are consistent with those outlined in Notice 2018-76 regarding business meal deductibility, as part of a broader entertainment event. However, the proposed regulations include two new examples where meals remain 50 percent deductible – 1. a taxpayer’s business lunch with a client and 2. a taxpayer’s performance review lunch with an employee.
The proposed regulations define certain terms commonplace when determining M&E deductibility, including the following:
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