By Jennifer Cranford, CPA
The 2017 Tax Reform Act, which was signed in to law on December 22, 2017, includes changes in the deductibility of entertainment expenses. Entertainment costs are now 100% non-deductible. Business meals, on the other hand, remain 50% deductible if certain criteria are met.
Notice 2018-76 issued October 2018, clarifies the guidance for the treatment of expenses for certain business meals and provides a few examples.
Effective for amounts paid or incurred after December 31, 2017, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under Sec 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Examples:
Assume food and beverages meet the ordinary and necessary expense under Sec 162(a) paid or incurred during the taxable year in carrying on a trade or business and are not lavish or extravagant. Also, assume the taxpayer (T) and the business contact (B) are not engaged in a trade or business that has any relation to the entertainment facility.
Example 1: T and B go to baseball game. T and B eat hot dogs and drinks while at the game.
Tickets = entertainment, non-deductible
Hot dogs & drinks = paid separately from game ticket, 50% deductible
Example 2: T and B go to baseball game. Tickets purchased are for the game and a suite, where they have access to food and beverages. Tickets state that food and beverages are included.
Tickets = entertainment, non-deductible
Food & beverages = entertainment, non-deductible since not purchased separately from game tickets and the amount for food & beverages is not separately stated on the ticket.
Example 3: T and B go to baseball game. Tickets purchased are for the game and a suite, where they have access to food and beverages. Tickets state that game admission is $XXX and food and beverages are $XXX.
Tickets = entertainment, non-deductible
Food & beverages = food & beverages amount separately stated on ticket, 50% deductible
Contact your Kernutt Stokes LLP professional tax advisor at 541.687.1170 if you have additional questions.
