Jackie StevensJackie Stevens

Entertainment Expense Deductions

Posted 10/18/2018

Cross References
• Notice 2018-76
• IRC §274
The Tax Cuts and Jobs Act (TCJA) imposed new restrictions on a business expense deduction for entertainment expenses. Effective for 2018, the new law provides that no deduction is allowed with respect to:
1) An activity generally considered to be entertainment, amusement or recreation,
2) Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or
3) A facility or portion thereof used in connection with any of the above items.
The law did not repeal the 50% deduction for business meals while the taxpayer is traveling on business.
The IRS recently issued new guidance on the deductibility of expenses for certain business meals associated with entertainment. The guidance announces that the IRS intends to publish proposed regulations under IRC section 274, which will include the guidance issued in Notice 2018-76.
Notice 2018-76 guidance. TCJA did not change the definition of entertainment under IRC section 274. Therefore, the regulations under IRC section 274(a)(1) that define entertainment continue to apply. TCJA did not address the circumstances in which food and beverages might constitute entertainment. Therefore, taxpayers may rely on Notice 201876 to determine whether a business meal is a deductible business meal subject to the 50% limit, or a nondeductible entertainment expense.
Under Notice 2018-76, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
1) The expense is an ordinary and necessary expense under IRC section 162(a) paid or incurred during the tax year in carrying on a trade or business,
2) The expense is not lavish or extravagant under the circumstances,
3) The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages,
4) The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact, and
5) In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.