The IRS issued two new proposed regulations under the meals and entertainment (M&E) rules that serve to describe, clarify and expand on the changes made to the M&E rules in the Tax Cuts and Jobs Act of 2017 (TCJA) and related subsequent guidance. Specifically, one of the proposed regulations focuses on entertainment expenses, with the other centered on food and beverage expenses. Generally, under the TCJA, entertainment expenses are not deductible and meals are 50% deductible. The proposed regulations further define what entertainment is and when meals are deductible.
The proposed regulations focus on two key concepts pertaining to entertainment expenses. First, entertainment is defined as “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer's family.”
The IRS also provided that an objective test will be used to determine whether an activity is entertainment. Therefore, if an activity is generally considered to be entertainment, it will be treated as entertainment regardless of whether the expenditure can also be described as not being an entertainment expense. Amounts treated as entertainment expenses are nondeductible.
Second, the proposed regulations make it clear that food or beverage expenses must be plainly distinguished from entertainment expenses. Taxpayers can distinguish food or beverage expenses from entertainment expenses by either (1) purchasing the food or beverage separately or (2) ensuring the cost of the food or beverage is stated separately from the cost of the entertainment. Food or beverage expenses purchased or stated separately are 50% deductible. If food or beverage is not purchased or stated separately, then no allocation can be made, and the entire amount is a nondeductible entertainment expenditure.
The other proposed regulation addresses food and beverage expenses — specifically, (1) what expenses are included in the cost of food or beverage, (2) when are the expenses deductible, and (3) whether the expenses are subject to the general limitation of 50% or meet an exception to be fully deductible.
The M&E rules say no deduction is allowed for the expense of any food or beverages unless such expense is:
The new rules incorporate these two requirements and expand the law by adding a third requirement that food or beverages must be provided to a business associate for the cost to be deductible.
The new rule, however, shouldn’t cause taxpayers much concern, as “business associate” is loosely defined to be “a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”
The question has also arisen concerning exactly what ancillary expenses should be included in the cost of food or beverage. The new rules define food or beverage expenses to mean the cost of food or beverages, including any delivery fees, tips and sales tax. The rules go on to say that in the case of employer-provided meals at an eating facility, food or beverage expenses do not include expenses for the operation of the eating facility such as salaries of employees preparing and serving meals, and other overhead costs.
As stated above, the general rule is food or beverage expenses are limited to 50%, unless they qualify for one of six exceptions. The new rules provide additional clarification on when these exceptions apply. The following provides a brief overview.
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