The IRS issued a notice recently (Notice 2018-76) to provide guidelines for taxpayers who wish to deduct entertainment or meals expenses. This notice is temporary until the regulations are written to coincide with the tax law changes made under the Act in 2017.
Under the prior version of IRC sec. 274, entertainment expenses were allowed under certain conditions up to 50%. These expenses were typically sports tickets for repeat clients, entertaining at the local country club prospective clients and so on.
However, under the new law, the 50% entertainment expense deduction has been removed. Thus, it will no longer be deductible. But, there are a few expenses that one might think are entertainment expenses, but would still be deductible. Let’s look at that distinction next…
Entertainment expenses that ARE deductible: Activities that although they satisfy personal, living, or family needs of an individual are not clearly regarded as entertainment such as:
a) Food money from an employer to an employee for working overtime
b) hotel room maintained by an employer for the benefit of their employees engaged in travel for the company
c) company vehicle
Objective Test used to determine if deductible (IRC 274-2(b)(1)(ii): This section shall be used to determine whether an activity is of a type generally considered to constitute entertainment. The taxpayer’s trade or business should be considered when determining whether or not the expense is considered to be deductible or non deductible entertainment. It turns on whether the entertainment is part and parcel of the job the taxpayer does or if it’s unrelated or ancillary to the job. For instance, a movie critic that goes to a movie to write up a review would be able to deduct the cost of the ticket. However, if that same movie critic brought his wife to the movie, her ticket would not be covered.
The 50% deduction for business meals did not change under the new law provided that a few guidelines are met by the taxpayer. In order for the taxpayer to take the deduction the following is required:
1. The expense is ordinary and necessary and paid or incurred during the taxable year (IRC 162)
2. The expense is not lavish or extravagant
3. The taxpayer or an employee of the taxpayer is present at the business meal
4. The food and beverage is provided to an existing or potential client, customer, consultant or business contact.
5. Food and beverage must be purchased separately from any entertainment activity.