The IRS recently issued Notice 2018-76 to provide transitional guidance on the deductibility of certain business meal expenses. Taxpayers may rely on the Notice until regulations are issued.
1. Interim guidance. Under the Notice, taxpayers may deduct 50% of an otherwise allowable business meal expense if (a) the expense is ordinary and necessary and incurred in carrying on a trade or business, (b) the expense is not lavish or extravagant, (c) the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages, (d) the food and beverages are provided to a current or potential customer, client, or business contact, and (e) where food and beverages are provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment or the cost is stated separately.
2. Examples. The Notice provides the following examples:
(a) A taxpayer invites a business contact to a baseball game. The cost of the game tickets is a nondeductible entertainment expense. The cost of hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense. Thus, the taxpayer may deduct 50% of the cost of the hot dogs and drinks.
(b) A taxpayer invites a business contact to a basketball game. The taxpayer purchases tickets in a suite where there is access to food and beverages. The cost of the food and beverages is included in the price of the tickets. The cost of the tickets is a nondeductible entertainment expense. Because the cost of the food and beverages is not paid separately and is not stated separately on the invoice, their cost is also a nondeductible entertainment expense.
(c) Assume the same facts as in the preceding paragraph except the invoice for the game tickets separately states the cost of the food and beverages. The taxpayer may deduct 50% of the food and beverage expenses because they avoid entertainment classification due to being separately stated.
3. Analysis. The Notice states entertainment may include providing food and beverages. The Notice states the Treasury Department and the IRS intend to publish regulations clarifying when business meal expenses are nondeductible entertainment and when they are 50% deductible.
It is surprising the Notice does not require a meaningful business discussion for meal expenses to avoid entertainment classification. If hot dogs at a baseball game are not entertainment, what food and beverage expenses are entertainment in light of the Notice’s acknowledgement that food and beverages can be entertainment?
Herman Spence III is an attorney with Robinson Bradshaw in Charlotte.