IRS Offers Guidance on M&E Deductions After Tax Reform

As part of the Tax Cuts and Jobs Act (TCJA), there have been changes to the treatment of certain business-related expenses, including travel, business meals, and entertainment. On Wednesday, the IRS released guidance on the business expense deduction for meals and entertainment in the wake of the TCJA, which was supposed to eliminate deductions for expenses pertaining to activities generally considered entertainment, amusement or recreation.

The TCJA did not change the definition of entertainment. Where things get murky, though, is whether providing food and beverages might be considered entertainment, especially if food and beverages are tied to an activity considered to be entertainment.

Under prior law, the rule was that you could deduct up to 50% of entertainment expenses directly related to the active conduct of a trade or business or, amusement, or recreation expenses directly related to your trade or business. That changed, however, with the passage of the tax code overhaul last December.

The IRS said taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the business) is present at the meal, and the food or beverages aren’t considered to be “lavish or extravagant.” The meals can involve a current or potential business customer, client, consultant or a similar business contact. Food and beverages provided during entertainment events won’t be considered entertainment if they’re bought separately from the event.

The Treasury Department and the IRS plan to publish proposed regulations that will make clear when business meal expenses are deductible and what constitutes entertainment. Until those proposed regulations take effect, taxpayers can rely on guidance in Notice 2018-76, which the IRS issued Wednesday in conjunction with the announcement.

Whether you are considering the new tax treatment of M&E expenses for 2018 or evaluating how tax reform will affect your overall tax situation, consult with the tax experts at Talley LLP today.