How to Apply the New Tax Rules for Meal Expenses
The IRS recently published Notice 2018-76 to signal their intent to issue proposed regulations for the food and beverage expenses deduction under Section 274. In the meantime, the Notice is intended to provide interim guidance to help taxpayers understand rules changes made for food and beverage expenses under the Tax Cuts and Jobs Act (TCJA) passed in December 2017. This expense is the M (meals) in the well-known M&E (meals and entertainment) expense category.
We covered the changes to entertainment in the article "New Tax Law Impacts Entertainment Expenses." This article will review and clarify the changes to meals under the new tax law.
Section 274 of the Internal Revenue Code was amended by the TCJA to eliminate business related entertainment expenses. However, the effect on business related meals was a source of much confusion for taxpayers in the wake of the changes to entertainment expenses. The IRS Notice (2018-76) basically stated that the meals expense under section 274 is virtually unchanged after the tax law change.
The Notice provides that: Section 274(k) generally provides that no deduction is allowed for the expense of any food or beverages unless,
(A) Such expense is not lavish or extravagant under the circumstances, and
(B) The taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages
Since entertainment expenses were eliminated under the new tax law, the notice clarifies which meals expenses are still deductible. Under this notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, they must be 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. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
The last rule (#5 above) seems to be the most relevant under the new rules. What do you do if you incur expenses at an entertainment activity (the examples in the notice use a baseball game)? To be deductible at 50% as a meals expense, the food and beverages must be purchased separate from the entertainment, or separately stated on the receipt so as to be identified as meals expense.
The application of the meals expense rules can be complicated so please consult with your professional tax advisor if you have questions.
"IRS Clarifies How to Accurately Deduct Meals" published 10/17/2018
"New Tax Law Impacts Entertainment Expenses" published 1/18/2018