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Nov 2018
12
November 12, 2018

IRS Notice Clarifies Treatment of Customer Business Meals

The 2017 Tax Cuts and Jobs Act (the “Act”) generally disallows deductions for expenses with respect to entertainment, amusement or recreation. This means that tickets for sporting events, theater tickets and similar entertainment expenses are generally no longer deductible, even though these activities precede or follow a substantial and bona fide business discussion.

The Act does not specifically address the deductibility of expenses for business meals, and there has been significant uncertainty regarding these expenses. On October 3, 2018, the IRS issued Notice 2018-76 (the “Notice”) which is intended to clear up some of this uncertainty.

The Notice provides that taxpayers may deduct 50 percent (as under old law) of an otherwise allowable business meal expense if:
 
  1. The expense is an ordinary and necessary business expense paid or incurred during the taxable year in carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and
  5. In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of entertainment on one or more bills, invoices or receipts. The entertainment disallowance rule may not be circumvented by inflating the amount charged for food and beverages.

The above rules indicate that most customer meals remain 50% deductible under the guidance provided in the Notice.

An example contained in the Notice indicates that while the cost of baseball game tickets is an entertainment expense and is not deductible, the cost of hot dogs and drinks that are purchased separately from the game tickets is not a non-deductible entertainment expense. The taxpayer is therefore able to deduct 50% of the cost of the hot dogs and drinks.

The Notice indicates that the Department of Treasury intends to publish proposed regulations under the new provisions added by the Act that will include guidance on the deductibility of business meals. The Notice further provides that until these proposed regulations are effective, taxpayers may rely on the guidance in the Notice regarding the deductibility of business meals.

Please contact Jay Kennedy or your Warner Norcross + Judd tax attorney if you have any questions regarding the Notice or other tax issues under the Act.

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