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IRS Proposes New Rules for Deducting Meals and Entertainment

March 09, 2020

Although the TCJA eliminated the deduction for meals and entertainment, a new proposal suggests it might make a comeback. Here’s what we know.

Attention businesses: the Internal Revenue Service has proposed new regulations for deducting meals and entertainment expenses. As you’ll remember, the Tax Cuts and Jobs Act (TCJA) got rid of this deduction for any expenses related to activities typically considered to be for entertainment, amusement or recreation. You may have seen our blog, Tax Reform FAQs: Are Business Related Entertainment Expenses Still Deductible? Let’s dive in to the new proposed rules.

Why were changes proposed?

Through the new proposed rules, the IRS is hoping to address the elimination of the deduction and give guidance as to what activities are considered entertainment. The proposed rules also address the limitation on the deduction of food and beverage expenses.

The regulations are expected to have an impact on taxpayers who pay or incur expenses for meals and entertainment. The rules primarily adhere to a notice that the IRS released in 2018, which spells out transitional guidance on the deductibility of expenses for certain business meals.

Proposed regulations

Under the proposed rules, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  • The expense is an ordinary and necessary business expense under Section 162(a) paid or incurred during the tax year when carrying on a trade or business
  • The expense is not lavish or extravagant under the circumstances
  • The taxpayer or an employee of the taxpayer is present when the food and beverages are furnished
  • The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact (*Important to note that this must 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. Employees fit this definition.)
  • For food and beverages provided during or at an entertainment activity, if they 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. (*Important to note that this cannot be circumvented through inflating the amount charged for food and beverages. The amount charged for food and beverages on a bill, invoice or receipt must reflect the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items.)

Is the IRS accepting comments?

Yes, the IRS is accepting comments on the proposed regulations (linked here). The IRS is also planning to host a public hearing on April 7th in Washington to discuss the proposal.

Questions? Contact us.

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