This notice provides transitional guidance on the deductibility of expenses for certain business meals under §274 of the Internal Revenue Code. Section 274 was amended by the Tax Cuts and Jobs Act, Pub. L. No. 115-97, §13304, 131 Stat. 2054, 2123 (2017) (the Act). As amended by the Act, §274 generally disallows a deduction for expenses with respect to entertainment, amusement, or recreation. However, the Act does not specifically address the deductibility of expenses for business meals.
This notice also announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to publish proposed regulations under §274, which will include guidance on the deductibility of expenses for certain business meals. Until the proposed regulations are effective, taxpayers may rely on the guidance in this notice for the treatment under §274 of expenses for certain business meals.
INTERIM GUIDANCE FOR BUSINESS MEALS
The Act did not change the definition of entertainment under §274(a)(1); therefore, the regulations under §274(a)(1) that define entertainment continue to apply. The Act did not address the circumstances in which the provision of food and beverages might constitute entertainment. However, the legislative history of the Act clarifies that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business.
The Treasury Department and the IRS intend to publish proposed regulations under §274 clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance in this notice for the treatment under §274 of expenses for certain business meals.
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, 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 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.
EXAMPLES
For each example, assume that the food and beverage expenses are ordinary and necessary expenses under §162(a) paid or incurred during the taxable year in carrying on a trade or business and are not lavish or extravagant under the circumstances. Also assume that the taxpayer and the business contact are not engaged in a trade or business that has any relation to the entertainment activity.
Example 1. (i) Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.
(ii) The baseball game is entertainment as defined in §1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the §274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
Example 2. (i) Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.
(ii) The basketball game is entertainment as defined in §1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the §274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.
Example 3. (i) Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.
(ii) As in Example 2, the basketball game is entertainment as defined in §1.274-2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the §274(a)(1) disallowance. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.