Business meal deductions after the TCJA.

• Author: Smolnik, Dan M.
• Position: Tax Cuts and Jobs Act of 2017

The business meal tax deduction has been debated for decades, the subject of presidential ire and of incremental diminution. In just the past few years, uncertainty has reigned regarding the availability and requirements for the business meal deduction because of its abrupt separation from its historic tax deduction counterpart --the business entertainment expense deduction. However, with the adoption of final regulations in 2020, the IRS has provided guidance on deducting the costs of business meals separately from entertainment. Since then, the deduction has even been temporarily restored to its former magnitude, allowing the full cost of such meals to be deducted under certain circumstances.

This article examines the history of the deduction and considers the 2020 final regulations and their implied separate treatment of business meals consumed while traveling away from the taxpayer's home. Also, with the rapidly rising return of the dine-in restaurant meal as pandemic restrictions in many areas across the United States ease, (1) this article provides a framework by which taxpayers may effectively document and substantiate their claims to the business meal deduction.

A brief history of the business meal tax deduction

The deductibility of business meals and other expenses is among the most contentious issues in tax law. Business travel expenses deducted under Sec. 274(d) were 20% of all the business tax issues litigated in cases brought in federal courts during a 2019-2020 one-year period and reviewed by the national taxpayer advocate (NTA). Combined with issues of substantiation and deductibility of other business expenses under Sec. 162, these were 53% of the issues litigated. (2) It thus appears that taxpayer confusion (3) over how and when business tax deductions may be claimed is likely the catalyst for many disputes with the IRS. (4) This article attempts to help taxpayers avoid an adverse encounter with the tax authorities with respect to business meals. (5)

The business meal deduction was cut to 80% of the cost in 1986, (6) then to 50% of the cost, effective Jan. 1,1994. (7) (For 2021 and 2022, the deduction is 100% for meals purchased from a restaurant. (8)) Over 56 years after President John F. Kennedy denounced the tax deductibility of business "expense account living," (9) Section 13304 of the law known as the Tax Cuts and Jobs Act (TCJA) (10) effectively eliminated from Sec. 274 the deduction for most entertainment expenses, without regard to how the entertainment may relate to a business relationship or activity. Because the TCJA did this by simply striking references to the most common allowable entertainment expenses from Sec. 274, the historic practice of treating meals and entertainment as largely interchangeable caused some confusion. Rumors soon abounded that the IRS would treat "business meals" as a form of entertainment and they too would be nondeductible. (11)

The confusion signaled two important issues. First, the long-standing legal overlap between a business meal and business entertainment had, in fact, reflected the practical overlap between business meals and business entertainment. The line was blurred because, in this context, there was no line. (12) The business meal has never been about acquisition of nutrition; it has only ever been about a shared experience. Second, Congress had failed to define "entertainment" as a concept separate from "meals" in the business context when it excised references to entertainment from Sec. 274. Because of the long practice of treating business meals and entertainment as merely different perspectives on the same transactions, removal of the entertainment deduction called into question the continued validity of the other.

IRS guidance

On Oct. 3,2018, the IRS stepped into the information gap with Notice 2018-76, which provided interim rules until final regulations were issued. In February 2020, the IRS issued proposed regulations (REG-100814-19), and in October 2020 the IRS issued final regulations that obsoleted Notice 2018-76.

Entertainment definition in final regulations: Regs. Sec. 1.274-ll(b)(l) of the final regulations, as had Notice 2018-76, incorporated the definition of entertainment found in Regs. Sec. 1.274-2(b)(l). Regs. Sec. 1.274-ll(b) (l)(i) defines "entertainment" as "any activity which is of a type generally considered to constitute entertainment, amusement, or recreation," listing as examples "entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips."

Under Regs. Sec. 1.274-11(b)(1)(H), a taxpayer applies an "objective test" to evaluate whether an activity is "of a type generally considered to constitute entertainment." If, under the objective test, the activity is generally considered to be entertainment, it is entertainment for purposes of Sec. 274(a) and the regulations, regardless of whether it could be described as something other than entertainment and even if the expense relates to the taxpayer alone. The objective test precludes arguments that "entertainment" means only entertainment of others or that entertainment expenses should be treated as advertising or public relations expenses.

However, Regs. Sec. 1.274-ll(b)(l)(ii) further provides that a taxpayer's trade or business is taken into consideration. For example, a theatrical performance is not entertainment for a professional theater critic attending the performance in a professional capacity, and a fashion show by a dress manufacturer to introduce its products to a group of store buyers generally would not constitute entertainment.

Meal expense deduction rules in final regulations: Under Regs. Sec. 1.274-12(a)(l), a taxpayer may deduct 50% of an otherwise allowable (13) meal expense if:

* 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...