The law known as the Tax Cuts and Jobs Act (TCJA), P.L 115-97, significantly changed Sec. 274 by eliminating the deduction for any expenses considered entertainment, amusement, or recreation. The amendments denied deductions for expenses for business entertainment and increased the scope of the deduction limitation for expenses related to food and beverages employers provided.
Because the Code was unclear about the deductibility of food and beverages expenses when combined with entertainment expense, the IRS provided transitional guidance on the deductibility of business meals through Notice 2018-76 and later through proposed regulations under Sec. 274 issued in February 2020 (REG-100814-19). On Sept. 30, 2020, the IRS issued Regs. Secs. 1.274-11 and 1.274-12 (T.D. 9925) to address the changes made to the meals and entertainment deduction under the TCJA.
Regs. Sec. 1.274-11 disallows the deduction for certain entertainment, amusement, or recreation expenditures paid or incurred after Dec. 31, 2017. An objective test is used to determine whether an activity is entertainment and the taxpayer's trade or business is considered when applying this test. Under this provision, any expenditure that is considered entertainment or in connection with an entertainment activity, including a facility used in connection with an entertainment activity, is not deductible. Dues or fees to any social, athletic, or sporting club, or to any organization that has connections to facilities are nondeductible. In addition, no deductions are allowed for amounts paid for membership in any business, pleasure, recreation, or social club.
However, under Regs. Sec. 1.274-11, entertainment does not include expenditures for food and beverages, unless the food or beverages are provided at an entertainment activity. Food and beverages provided at an entertainment activity are considered an entertainment expense and not deductible unless the food or beverage cost is stated separately from the cost of the entertainment cost on bills, invoices, or receipts. If the food or beverages are not purchased separately from the entertainment, or there is no reasonable allocation of the cost of food or beverages on the invoice separate from the cost of entertainment, then the entire amount is nondeductible.
The following examples illustrate Regs. Sec. 1.274-11. The taxpayers are deemed to be engaged in a trade or business under Sec. 162 and the taxpayers' business is not an entertainment activity.
Example 1: X invites Y, a business associate, to a college basketball game to discuss business where X purchases the tickets for both X and Y. The college basketball game is considered entertainment under Regs. Sec. 1.274-11(b)(1) and therefore X cannot deduct the cost of the tickets.
Example 2: Given the same facts as Example 1, except that in addition to the cost of tickets, X buys Y dinner in the alumni tent before the game. The cost of dinner, which is purchased separately from the cost of the tickets, is not considered entertainment and is therefore deductible, as meals not disallowed by Regs. Sec. 1.274-11(a) and Sec. 274(a)(1), but is subject to the 50% limit on expenses for meals under Sec. 162 and Regs. Sec. 1.274-12.
Example 3: X invites Y, a business associate, to a college basketball game and purchases two tickets for them to attend the game in a suite in the college's arena, which includes the cost of all food and beverages. The cost of the tickets is considered entertainment under Regs. Sec. 1.274-11(b)(1) and is not deductible. Likewise, since the food and beverages are not purchased separately from the tickets, the cost of the food and beverages is considered entertainment and nondeductible under Sec. 274(a)(1).
Example 4: Given the same facts as in Example 3, except that the invoice X received separates the cost of the tickets from the cost of the food and beverages. Similarly to Example 3, the cost of the tickets is deemed to be nondeductible entertainment. However, the costs of the food and beverages, which are stated separately on the invoice and are at the usual price charged by the college's concession stand if purchased separately, are not deemed to be entertainment expenditures disallowed under Regs. Sec. 1.274-11(b)(1); therefore X may deduct 50% of the cost of the food and beverages if the expenses meet the Sec. 162 and Regs Sec. 1.274-12 requirements.
Regs. Sec. 1.274-12 describes the limitation on deductions for certain food or beverage expenses paid or incurred after Dec. 31, 2017. The regulations do not amend the provisions relating to the deductibility of business meals. Thus, taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, including meals consumed by employees on work travel (H.R. Conf. Rep't No. 115-466, 115th Cong., 1st Sess., at 407 (Dec. 15, 2017)). However, as before TCJA, no deduction is allowed for the expense of any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished (Sec. 274(k)).
Example 1: E holds a business meeting at a hotel during which food and beverages are provided to attendees. Expenses for the business meeting, other than the cost of food and beverages, are not subject to the deduction limitations in Sec. 274 and are deductible if they meet the requirements for deduction under Sec. 162. Under Secs. 274(k) and (n) and paragraph (a) of this regulation section, E may deduct 50% of the food and beverage expenses.
Example 2: The facts are the same as in Example 1 above, except that all the attendees of the meeting are employees of E. Expenses for the business meeting, other than the cost of food and beverages, are not subject to the deduction limitations in Sec. 274 and are deductible if they meet the requirements for deduction under Sec. 162. Under Secs. 274(k) and (n) and paragraph (a) of this section, E may deduct 50% of the food and beverage expenses. The exception in Sec. 274(e)(5) does not apply to food and beverage expenses under Secs. 274(k) and (n).
The amendments to Regs. Sec. 1.274-12 also incorporate the substantiation requirements in Sec. 274(d) to travel meals, whereby no deduction is allowed for the expense of any food or beverage paid or incurred while traveling away from home in pursuit of a trade or business unless the taxpayer meets those substantiation requirements. Regs. Sec. 1.274-12 also applies the limitations of Sec. 274(m)(3) for food and beverage expenses while on travel for spouses, dependents, or other individuals accompanying the taxpayer, or officer or employee of the taxpayer on business travel.
Meals at social and recreational activities
Food or beverage expense paid or incurred by a taxpayer for a recreational, social, or similar activity primarily for the benefit of the taxpayer's employees is not subject to the 50% deduction limitation under Regs. Sec. 1.274-12. This easing of the 50% deduction limitation does not apply if the employee is highly compensated, or if an employee owns 10% or more interest in the taxpayer's trade or business. Any expense for food or beverage that discriminates in favor of highly compensated employees is not considered to be made primarily for the benefit of employees per Regs. Sec. 1.274-12 (c)(2)(iii).
Examples of these recreational and social activities where food and beverage expenses are incurred by the taxpayer but not subject to the 50% deduction limitation include food or beverages provided by a real estate agent at an open house; food or beverages provided by a seasonal camp to camp counselors; food or beverages provided by a company to employees at a company cafeteria; food or beverages provided by a restaurant or catering business to food service workers while working in the restaurant or catering business. However, snacks available to employees in a pantry, break room, or copy room are subject to the 50% deduction limitation as a "break room is not a recreational, social, or similar activity primarily for the benefit of employees, even if some socializing related to the food and beverages provided occurs" (Regs. Sec. 1.274-12 (c)(2)(iii)).
Meals as de minimis fringe benefits
Before the TCJA, expenses for food or beverages that were excludable from employee income under Sec. 274(n)(2)(b) as Sec. 132(e) de minimis fringe benefits were not subject to the 50% deduction limitation and could be fully deducted unless another exception under Sec. 274(e) applied. TCJA repealed Sec. 274(n)(2)(B) so that these food and beverage expenses excludable from employee income are now subject to the 50% deduction limitation under Regs. Sec. 1.274-12.
Regulations bring clarity
In summary, TCJA eliminated the deduction for expenses related to entertainment, amusement, or recreational activities. These final regulations bring clarity for the business community on what food and beverage expenses are deductible related to entertainment, amusement, or recreational activities, as well as how to treat the business deductions.
— C. Andrew Lafond, CPA, DBA, and Tom Adams, CPA, CGMA, Ph.D., are an associate and an assistant professor, respectively, at La Salle University in Philadelphia. To comment on this article or to suggest an idea for another article, contact Sally Schreiber, a Tax Adviser senior editor, at Sally.Schreiber@aicpa-cima.com.