The business meal expense deduction after the TCJA.

• Author: Nash, Claire Y.
• Position: Tax Cuts and Jobs Act of 2017

Uncertainty continues regarding whether food-and-beverage expenses incurred in association with a taxpayer's trade or business are "entertainment" and therefore not deductible following the passage of the law known as the Tax Cuts and Jobs Act (TCJA). (1) Although the definition of entertainment is not provided in the statute, Treasury and the IRS have consistently viewed and treated food-and-beverage expenses as entertainment, and the courts have consistently applied that interpretation of the statute in their decisions.

In October 2018, the IRS issued Notice 2018-76 to announce its intent to publish proposed regulations under the amended statute and provide interim guidance on the deductibility of business meal expenses under Sec. 274, as amended by the TCJA. Taxpayers are still waiting for Treasury to issue proposed regulations. Without them, taxpayers continue to question whether business meal expenses are deductible and call for Treasury regulations clarifying the effect of the TCJA on the business meal expense deduction. Taxpayers should continue to rely on Notice 2018-76 as substantial authority for their business meal expense deductions until proposed regulations are issued. In the absence of more definitive guidance, the Treasury notice is substantial authority under Sec. 6662.

Background

As taxpayers continue to debate whether business meals are deductible under Sec. 274 as amended, some argue that the statute is clear and unambiguous in its intent to include meals as entertainment and that, without further congressional action, business meal expenses are nondeductible. Others argue that congressional intent can be construed from House and Senate comments contained in the TCJA conference committee report. (2) Until Treasury issues regulations on the matter, taxpayers weighing whether the authority of Notice 2018-76 is sufficient should consider it substantial authority that resolves the matter in the interim. (3) Taxpayers should not consider the absence of more authoritative administrative guidance from Treasury as an indication that they should forgo business meal expense deductions in the current and future periods.

To analyze the current standing of the business meal expense deduction, this article will first review the history of Sec. 274, then examine the TCJA amendments to that provision, and finally discuss the IRS's interim guidance on the deductibility of business meals.

Statutory history

Prior to 1962, when Sec. 274 was enacted, where a "business purpose, however slight," existed, entertainment expenses generally were fully deductible if they were ordinary and necessary business expenses. (4) As originally enacted, Sec. 274(a) referred exclusively to entertainment, amusement, and recreation and did not mention food, beverages, or meals. Specifically, Sec. 274(a) at that time provided in part that: (5)

(1) In general. No deduction otherwise allowable under this chapter shall be allowed for any item--

(A) Activity. With respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation ...

Business meals appeared in the original exceptions to Sec. 274(a) outlined in Sec. 274(e), reflecting that food and beverages broadly fall within the entertainment category. Sec. 274(e) as originally enacted read:

(e) Specific Exceptions to Application of Subsection (a).--Subsection (a) shall not apply to--

(1) Business Meals.--Expenses for food and beverages furnished to any individual under circumstances which (taking into account the surroundings in which furnished, the taxpayer's trade, business, or income-producing activity and the relationship to such trade, business, or activity of the persons to whom the food and beverages are furnished) are of a type generally considered to be conducive to a business discussion. [Emphasis added]

The Senate Finance Committee report accompanying the Revenue Act of 1962 clearly contemplated that food-and-beverage expenses are entertainment expenses. In its comments, the Finance Committee indicated that "'entertainment' includes any business expense incurred in the furnishing of food and beverages." (6) These comments make it clear that in 1962 Congress regarded business meals as entertainment, resulting in the need for Sec. 274(e) to exclude them from the disallowance provision in Sec. 274(a).

Under Sec. 274(e) as originally enacted, then, business meals were deductible if they met the ordinary and necessary business expense test under Sec. 162. (7) Although the exception for business meals under Sec. 274(e)(1) was repealed in 1986, (8) its inclusion in the statute as originally enacted reflected the view that entertainment expenses include business meals and therefore necessitated that they be among the exceptions to Sec. 274(a) at the time the statute was enacted.

The exclusion under Sec. 274(e) as originally enacted meant that business meal expenses did not have to meet the "business connection" test required to deduct other entertainment expenses. (9) In 1986, Congress amended Sec. 274 to...