Deductions for meal and entertainment expenses.

• Author: Bonner, Paul

On Sept. 30, the IRS issued final regulations (T.D. 9925) implementing provisions of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, that disallow a business deduction for most entertainment expenses. The regulations also clarify the treatment of business deductions for food and beverages that remain deductible, generally limited to 50% of qualifying expenditures, and how taxpayers may distinguish those expenditures from entertainment.

The final regulations adopt, with a number of clarifications in response to comments, proposed regulations issued in February 2020 (REG-100814-19; see also "Proposed Regs. Issued on Meal and Entertainment Expense Deductions," Feb. 24, 2020, available at tinyurl.com/yxmuxnvu). The proposed regulations were based, in turn, on Notice 2018-76, published in October 2018.

Sec. 274(a)(1)(A) generally disallows a deduction for any activity of a type generally considered entertainment, amusement, or recreation. Before the subsection's amendment by the TCJA, effective for amounts paid or incurred after Dec. 31, 2017, Sec. 274(e) allowed an exception to the general rule in Sec. 274(a)(1)(A) for entertainment that was preceded or followed by substantial and bona fide business discussions, as well as a number of other exceptions. The TCJA repealed this exception but did not repeal the other exceptions under Secs. 274(e), including, for example, certain recreational activities for the benefit of employees, reimbursed expenses, and entertainment treated as compensation to an employee or includible in gross income of a nonemployee as compensation for services or as a prize or award (and reported by the taxpayer as such).

The TCJA similarly removed a reference to entertainment in Sec. 274(n)(l) with respect to the 50% limitation of deductibility of food or beverages, but it left that provision otherwise intact. Also remaining after the TCJA with respect to food or beverage expenses are the Sec. 274(k) general requirements that they not be lavish or extravagant under the circumstances and that the taxpayer or an employee of the taxpayer is present...