On Oct. 3, 2018, the IRS issued Notice 2018-76 as the first round of interpretation to the deduction for entertainment under the Tax Cuts and Jobs Act (TCJA) amendment. Until regulations are issued, taxpayers can rely on the guidance provided in this notice.
IRC Section 274 specifies the rules for deducting business meals and entertainment. Meals and entertainment are intertwined in a sense because business meals are used, in part, to entertain clients, prospects and contacts. Although the TCJA made it clear that meals were still deductible, there was concern that the IRS might interpret the rules in a manner to reduce the deductibility of business meals.
The notice indicates that meals are still 50 percent deductible if they meet all of the following requirements:
- The meal is an ordinary and necessary business expense under Section 162(a) paid or incurred during the taxable year.
- The meal is not lavish or extravagant under the circumstances.
- The taxpayer or an employee of the taxpayer is present when the meal is furnished.
- The meal is provided to a current customer, prospect, consultant or similar business contact.
- Any meal provided in conjunction with an entertainment activity must have a separately stated cost on the invoice/receipt. The entertainment disallowance rule cannot be circumvented by artificially inflating the cost of the meal.
Notice 2018-76 examples make it clear that even a meal provided at a baseball or basketball game can be deducted assuming the cost is separately stated.
The IRS has requested that any comments on the notice be submitted by Dec. 2, 2018.