Proposed regulations reflect the significant changes that the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) made to the Code Sec. 274 deduction for travel and entertainment expenses. For most expenses paid or incurred after 2017, TCJA:
- repealed the “directly related to a trade or business” and the business-discussion exceptions to the general disallowance of entertainment expense deductions;
- eliminated the general business expense deduction for 50 percent of entertainment (but not meal) expenses; and
- repealed the special substantiation rules for deductible entertainment (but not travel) expenses.
Taxpayers may rely on the proposed regulations until they are finalized. Taxpayers may also continue to rely on similar guidance that was provided in Notice 2018-76, I.R.B. 2018-42, 599.
Among other things, new Proposed Reg. §1.274-11:
- restates the statutory rules of Code Sec. 274(a), including the entertainment deduction disallowance rule for dues or fees to any social, athletic, or sporting club or organization;
- substantially incorporates the existing definition of “entertainment” from Reg. §1.274-2(b)(1); and
- confirms that the nine exceptions in Code Sec. 274(e) continue to apply to deductible entertainment expenditures.
However, the proposed regulations also confirm that “entertainment” does not include food or beverages unless they are provided at or during an entertainment activity, and their costs are included in the entertainment costs.
Food and Beverage Expenses
As under Notice 2018-76, Proposed Reg. §1.274-12 allows taxpayers to deduct 50 percent of business meal expenses if:
- the expense is an ordinary and necessary business expense;
- the expense is not lavish or extravagant;
- the taxpayer or an employee is present when the food or beverage is furnished;
- the food or beverage is provided to a current or potential business customer, client, consultant, or similar business contact; and
- food and beverages that are provided during or at an entertainment activity are purchased separately from the entertainment, or their cost is separately stated.
With respect to the fourth requirement listed above, the proposed regulations adopt the definition of “business associate” in Reg. §1.274-2(b)(2)(iii), but expands it to include employees. Thus, these requirements would apply to employer-provided meals to employees as well as non-employees.
The proposed regulations also flesh out the fifth requirement listed above, and clarify that the separate charges for entertainment-related food and beverages must reflect their actual cost. Without a separate charge, none of the entertainment cost may be allocated to deductible food and beverage expenses.
In addition, the proposed regulations apply the general rules for deductible meal expenses to meal deductions for business travel.
Exceptions and Special Rules
The proposed regulations define “food or beverage expenses” to include delivery fees, tips, and sales tax. However, food or beverage expenses for employer-provided meals at an eating facility do not include expenses for the operation of the facility, such as salaries of employees preparing and serving meals, and other overhead costs.
The proposed regulations apply the TCJA changes to the exceptions and special rules for deductible food and beverages in Code Sec. 274(e), (k) and (n), including:
- reimbursed food or beverage expenses;
- recreational expenses for employees;
- items available to the public;
- goods or services sold to customers.
Finally, the proposed regulations also provide examples on several specific scenarios to illustrate the rules, including:
- food or beverages provided to food service workers who consume the food or beverages while working in a restaurant or catering business;
- snacks available to employees in a pantry, break room, or copy room;
- refreshments provided by a real estate agent at an open house;
- food or beverages provided by a seasonal camp to camp counselors;
- food or beverages provided to employees at a company cafeteria; and
- food or beverages provided at company holiday parties and picnics.
The IRS requests comments on all aspects of the proposed regulations, especially the definition of entertainment, including how to distinguish entertainment from advertising and travel; the use of the objective test in defining entertainment activities; changes from Notice 2018-76 to the rules for business meals; the application of the Code Sec. 274(e) exceptions to entertainment, food and beverage expenditures; and whether additional issues or examples should be provided.
A public hearing on the proposed regulations is scheduled for 10 a.m. on April 7, 2020. The IRS must receive written or electronic comments by April 13, 2020. Comments may mailed to the IRS, or submitted electronically via the Federal Rulemaking Portal at www.regulations.gov (indicate IRS and REG-100814-19).