What's in a game? Meals and entertainment final regulations under the TCJA
Final regulations from the Treasury Department and IRS address changes made by the TCJA to business meal and entertainment expense deductions.
The Treasury Department and IRS issued final regulations addressing changes made by the TCJA to business meal and entertainment expense deductions. The TCJA generally eliminated the deduction for entertainment expenses but continues to allow the deduction for 50% of the cost of business meals.
The final regulations provide guidance on activities considered to be entertainment and requirements for deducting expenses for food and beverages. See news release IR-2020-225 for a short introduction to the regulations.
The final regulations are effective for tax years beginning on or after October 9, 2020 (the date they’re published in the Federal Register).
Entertainment expenses paid or incurred after December 31, 2017 are disallowed
The term “entertainment” refers to any activity generally considered to constitute entertainment, amusement, or recreation. It may include, but is not limited to entertaining at bars, theaters, country clubs, sporting events, and vacation trips.
An objective test is applied to determine whether a particular activity is considered entertainment. This means entertainment does not just refer to entertainment of others but may involve only the taxpayer and the taxpayer’s family.
Activities are treated as entertainment expenses even if associated with the active conduct of a taxpayer’s trade or business. However, the taxpayer’s trade or business is considered in applying the objective test.
Application of Objective Test
For example, if a dress manufacturer conducts a fashion show to introduce its lines to store buyers, the show would not be considered entertainment. But if an appliance distributor conducts a fashion show to attract potential customers, the show would be considered entertainment. In that instance the distributor could not write off the show expense as an advertising or public relations expense.
Entertainment expenses also include expenditures for facilities used in connection with entertainment. Dues or fees paid to a social, athletic, or sporting club or organization are treated as items paid with respect to entertainment facilities and are not deductible. Likewise, membership fees in any club organized for business, pleasure, recreation, or other social purpose are not deductible.
Circumstances determine whether an activity that satisfies personal, living, or family needs of an individual constitute entertainment. For example, providing a hotel room and rental car to an employee on a business trip would not be considered entertainment, but providing a hotel room and car to an employee on vacation would constitute entertaining the employee.
Food and beverage expenses at entertainment activities are not deductible unless billed separately
Food and beverage expenses provided at an entertainment activity are generally considered part of the activity unless the food or beverages are purchased separately from the entertainment or stated separately on one or more bills, invoices, or receipts. Amounts charged for the food or beverages on separately stated bills, etc. must reflect the venue’s usual selling cost for those items if they were purchased separately or must approximate the reasonable value for those items.
Example: Clyde Co. invites a business associate to attend a basketball game in a suite where food and beverages are served. The cost of the suite tickets includes the food and beverages. The entire expenditure is therefore considered entertainment and is non-deductible.
If instead the cost of food and beverages is separately stated on the suite invoice and reflects the venue’s usual selling price, the food and beverage cost is not treated as entertainment. Clyde Co. may deduct 50% of the food and beverage expense. The rest of the suite ticket charges constitute nondeductible entertainment expenses.
Guidelines for meal expense deductions
Expenses for meals are treated as ordinary and necessary business expenses for which a 50% deduction is allowed if all of the following criteria are met:
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer, or employee of the taxpayer is present when the food or beverages are served.
- The taxpayer or business associate of the taxpayer are provided to the taxpayer or business associate.
Business associates include anyone with whom the taxpayer could reasonably expect to engage or deal in the active conduct of a trade or business, including customers, clients and prospective clients, employees, independent contractors, agents, and professional advisors.
There is no change to the restriction that the cost of food and beverages provided to the spouse or dependent of a taxpayer or business associate is not a deductible expense.
Food or beverages means all food and beverage items, whether referred to as meals, snacks (including free breakroom coffee and snacks), and de minimis fringe items. The cost of meals includes delivery fees, tips, and sales taxes.
Exceptions to the 50% limitation on deducting meal expenses
The tax law under §274(e) includes a number of exceptions to the 50% limit on deducting expenses for business meals, all of which are still in place. The final regulations provide guidance on several of the exceptions.
Recreational expenses for employees
Any food or beverage expense for a recreational, social, or similar activity made for the benefit of a taxpayer’s employees (with the exception of highly compensated employees) is not subject to the 50% limitation.
Example. Lucky, Inc. invites all employees to a holiday party in a hotel ballroom that includes a buffet dinner and an open bar. The party is treated as a recreational, social, or similar activity for the benefit of non-highly compensated employees.
Lucky may deduct 100% of the cost of the party, including the cost of food and beverages.
Expenses treated as compensation
Expenses incurred for food or beverages are not subject to the 50% limit to the extent the expense is treated as compensation to the employee.
Example. Good LLC provides food and beverages to its employees at a company cafeteria on its premises. Good includes the full fair market value of the food and beverages as compensation and wages and may deduct 100% of the food and beverage expense.
If Good’s employees paid something toward the food and beverages, Good must include the difference between the fair market value of the meals and the amount employees pay as part of their compensation and wages in order to deduct 100% of the food and beverage expense.
Goods and services sold to the public
To the extent food and beverages are sold to customers in a bona fide transaction for full consideration (meaning customers pay for the full value of the food and beverages) the 50% limit does not apply. Thus, a restaurant or catering business may deduct 100% of the cost of food and beverages purchased in connection with providing meals to paying customers.
If the restaurant provides food and beverages to its food service employees before, during, or after their shifts at no charge the expense is 100% deductible as well because the restaurant is in the business of selling these items to customers for full consideration.
See the final regulations for other exceptions including reimbursement arrangements and food and beverages provided to independent contractors as compensation.