Yes, that is right, the IRS just helped out all businesses. It is not too often that you hear those words. Again, the IRS is helping businesses. On October 3, 2018, the IRS took action to restore the 50% meal deduction, which the US Congress took away in the new 2018 tax law. All businesses will benefit from this restoration of the meals and entertainment deduction 2018, especially restaurants, as they were hit the hardest.
Background on the Meals Deduction
Prior to the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, businesses were allowed, as a necessary and ordinary expense, a 50% meal deduction on their taxes so long as they had support and a business purpose. In December 2017, when Congress passed the new tax law (TCJA) they took away the meals and entertainment deduction for 2018.
However, on October 3, 2018, the IRS issued Notice 2018-76, which restores the 50% deduction for business meals only and did not restore the entertainment deduction. Not only did their action restore the 50% meal deduction, we were told that we do not have to wait for the regulations, which will come out later. This is huge!! A notice is not proper evidence in tax court, but the IRS made the statement in their notice that taxpayers will be able to rely upon this Notice 2018-76 until the Regulations are issued. Wow, a tone change at the IRS? Maybe, let’s see how far it continues, but it does provide some brightness.
Guidance on 50% Meals Deduction 2018
Taxpayers may deduct 50% of an allowable business meal expense if:
- The expense is an ordinary and necessary expense in carrying on any trade or business.
- The expense is not lavish or extravagant.
- The taxpayer, or an employee of the taxpayer, is present at the meal.
- A meal is provided to potential business customer, client, consultant, or similar business contact.
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages that are purchased separately from the entertainment would be deductible, but not the entertainment.
Here is an example applying # 5 above: Taxpayer A invites customer B to a football game. A purchases tickets for A and B to attend the game and while at the game, A buys food and drinks for B. So long as the food and drinks were paid for separately from the tickets, it would result in the food and drinks becoming 50% deductible. If the football ticket price included food and drinks, then no deduction, as it all will be treated as entertainment with zero deduction.
Guidance on Entertainment Deduction
The entertainment deduction was not restored; however, the IRS provided some guidance on entertainment. Beware of this guidance as some have been thinking about naming the entertainment expense as advertising or other.
Here is what the IRS said about entertainment in this Notice 2018-76:
“This objective test precludes arguments such as that “entertainment” means only entertainment of others or that an expenditure for entertainment should be characterized as an expenditure for advertising or public relations. However, in applying this test the taxpayer’s trade or business shall be considered. Thus, although attending a theatrical performance would generally be considered entertainment, it would not be considered entertainment for a professional theater critic attending in a professional capacity.”
So to summarize, regarding the meals and entertainment deduction 2018, the IRS did help all businesses by restoring the 50% meal deduction. In addition, they provided caution on what is an entertainment expense and for those who were considering treating it as advertising or public relations, the IRS is not going to allow this.
Submitted by Willett CPA. Ralph Willett is a CPA in Gilbert, Arizona and specializes in tax and accounting. He can be reached at 480-699-2308 and his office is located at 3303 S Lindsay Rd. Suite 103, Gilbert, AZ 85297.