Changes to Meal and Entertainment Deductions

IRS Proposes Changes to Meals and Entertainment Deductions

Last month, the IRS issued proposed changes to the rules governing the deduction of business-related meals and entertainment expenses. Specifically, the changes are intended to address concerns related to what qualifies as an entertainment activity, as well as the limitation on the deduction of food and beverage expenses.

Meals and entertainment deductions were most recently addressed as part of the Tax Cuts and Jobs Act (TCJA) of 2017, which effectively eliminated deductions for any expenses related to entertainment or recreation activities and placed restrictions on expenses for food and beverages offered to employees.

After receiving comments regarding the applicability of meals as entertainment activities in and of themselves, the IRS issued the new proposed guidance. The new rules note that while entertainment expense deductions were eliminated under the TCJA, the rules regarding the deductibility of business meals were not impacted. Therefore, taxpayers can continue to deduct up to 50 percent of food and beverage expenses in conjunction with business opportunities, as long as a) the expense is not lavish or extravagant under the circumstances and b) the taxpayer is present at the time of consumption.

Additional comments were received regarding the eligibility of certain business meals given the previous language only specified a ‘potential business contact’. The new proposed rules clarify that meals are deductible if furnished to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

The IRS is continuing to receive comments related to these deductions and will hold a public hearing on the proposed regulations on April 7, 2020.

To better understand how your business may be impacted by these changes, please feel free to reach out to a member of our Tax Team.

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