On February 26, 2020, the IRS published proposed regulations implementing changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) regarding the elimination of deductions for entertainment and the limitation on food and beverage expenses. The regulations largely track prior IRS guidance, Notice 2018-76, on these issues.
Internal Revenue Code (IRC) Section 274 generally limits employer deductions for meal expenditures and disallows deductions for entertainment expenditures. The proposed regulations apply the entertainment disallowance rule whether or not the activity is related to the taxpayer’s trade or business.1 It also provides guidance on whether an activity should be considered entertainment. The proposed regulations, however, also provide that 50% of food and beverage expenses may be deducted if they are not “lavish or extravagant,” the taxpayer or a taxpayer’s employee is present, and the cost of the meal is stated separately.
The TCJA repealed heightened substantiation requirements for entertainment expenses under IRC Section 274. However, under the proposed regulations, traveling expenses for employees will remain subject to the IRC Section 274(d) substantiation requirements.2 The proposed regulations also clarify that the exception for recreation that benefits employees under IRC Section 274 (e)(4) does not apply to free food or beverages provided in a break room, holiday party or company picnics. The IRS is also seeking comments on the standard for events where meals are provided to both employees and non-employee business associates.
Comments to the IRS on the proposed regulations are due by April 13, 2020, and a public hearing is scheduled for April 7, 2020.
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