The Tax Cuts and Jobs Act (TCJA) imposed new restrictions on a business expense deduction for entertainment expenses. Effective for 2018, the new law provides that no deduction is allowed with respect to:
1) An activity generally considered to be entertainment, amusement or recreation,
2) Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or
3) A facility or portion thereof used in connection with any of the above items. The law did not repeal the 50% deduction for business meals while the taxpayer is traveling on business.
The IRS recently issued new guidance on the deductibility of expenses for certain business meals associated with entertainment. The guidance announces that the IRS intends to publish proposed regulations under IRC section 274, which will include the guidance issued in Notice 2018-76.
Under Notice 2018-76, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
1) The expense is an ordinary and necessary expense under IRC section 162(a) paid or incurred during the tax year in carrying on a trade or business,
2) The expense is not lavish or extravagant under the circumstances,
3) The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages,
4) The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact, and
5) 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.
In the following examples, assume that the food and beverage expenses are ordinary and necessary expenses under IRC section 162(a) paid or incurred during the tax year in carrying on a trade or business and are not lavish or extravagant under the circumstances. Also assume that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity.
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