Internal Revenue Service Publishes Regulations Clarifying Business Meal and Entertainment Expenses

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Although the 2017 Tax Cuts and Jobs Act (TCJA) suspended the 2% of AGI miscellaneous deductions for individuals beginning in 2018, certain taxpayers may still claim deductions for unreimbursed business expenses, including sole proprietors, certain government officials, Armed Forces reservists and partners in flow-through entities who are regarded as self-employed individuals. Such individuals who incur business expenses that are not reimbursed by their employer or business entity may still claim deductions in calculating their taxable income.

The TCJA, perhaps in order to offset costs of the Act’s general tax cut provisions by “closing loopholes” or enacting revenue raising provisions, eliminated the deduction for entertainment, amusement and recreation and associated expenses. However, exceptions from the entertainment expense disallowance apply to certain categories of expenses, including meal expenses (which in most cases are still subject to a 50% deduction limitation).

The IRS provided temporary guidance in late 2018 in the form of Notice 2018-76 describing when meal expenses incurred before, after or during entertainment-related activities may still qualify for deduction. Now, the IRS has just published proposed regulations (which may be relied on by taxpayers until final regulations are published). The proposed regulations further clarify the circumstances under which meals remain deductible. In addition to IRS guidance on these issues, taxpayers are reminded that such expenses may not be “lavish or extravagant” under the circumstances, and remain subject to the substantiation and other requirements of Internal Revenue Code Section 274.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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