The IRS on Wednesday issued final regulations (T.D. 9925) implementing provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, that disallow a business deduction for most entertainment expenses. The regulations also clarify the treatment of business deductions for food and beverages that remain deductible, generally limited to 50% of qualifying expenditures, and how taxpayers may distinguish those expenditures from entertainment.
The final regulations adopt, with a number of clarifications in response to comments, proposed regulations issued in February 2020 (REG-100814-19; see also “Proposed Regs. Issued on Meal and Entertainment Expense Deductions,” Feb. 24, 2020). The proposed regulations were based, in turn, on Notice 2018-76, published in October 2018.
Sec. 274(a)(1)(A) generally disallows a deduction for any activity of a type generally considered entertainment, amusement, or recreation. Before their deletion by the TCJA, effective for amounts paid or incurred after Dec. 31, 2017, the subsection allowed several exceptions, including for entertainment that was preceded or followed by substantial and bona fide business discussions. The TCJA did not repeal other exceptions under Secs. 274(e)(1) through (9), including, for example, certain recreational activities for the benefit of employees, reimbursed expenses, and entertainment treated as compensation to an employee or includible in gross income of a nonemployee as compensation for services or as a prize or award (and reported by the taxpayer as such).
The TCJA similarly removed a reference to entertainment in Sec. 274(n)(1) with respect to the 50% limitation of deductibility of food or beverages, but it left that provision otherwise intact. Also remaining with respect to food or beverage expenses are the Sec. 274(k) general requirements that they not be lavish or extravagant under the circumstances and that the taxpayer or an employee of the taxpayer is present when food or beverages are served. Food and beverages must also be an ordinary and necessary business expense under Sec. 162(a).
The TCJA also applied the 50% limitation on food or beverages to de minimis fringe employee benefits under Sec. 132(e) (unless another exception under Sec. 274(e) applies), which formerly were not subject to it.
Thus, business taxpayers must separate deductible meal expenses from nondeductible entertainment expenses, and the regulations address how this is done in a variety of circumstances.
The regulations clarify that “entertainment” for purposes of Sec. 274(a) does not include food or beverages unless they are provided at or during an entertainment activity and their costs are not separately stated from the entertainment costs.
The final regulations provide that the food or beverages must be provided to 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.” Accordingly, the final regulations apply this definition to employer-provided food or beverage expenses by considering employees as a type of business associate, as well as to the deduction for expenses for meals provided by a taxpayer to both employees and nonemployee business associates at the same event.
The final regulations added several new examples to the proposed regulations and slightly modified others in response to comments asking for clarification.
The final regulations are effective upon their publication in the Federal Register. Taxpayers may also rely upon the proposed regulations for expenses paid or incurred after Dec. 31, 2017.
— Paul Bonner (Paul.Bonner@aicpa-cima.com) is a Tax Adviser senior editor.