HAVE YOUR CAKE AND DEDUCT IT TOO: MEAL DEDUCTIBILITY UNDER NEW SECTION 274
Tax Law Section
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The Notice clarified that
taxpayers generally may
continue to deduct 50
percent of the food and
beverage expenses
associated with operating
their trade or business.
W
hile the general
rule of § 274 is
clear (no deduction
is allowed with
respect to an activity that is of
a type generally considered
to constitute entertainment,
amusement, or recreation…),
many practitioners have been in
a holding pattern regarding the
deductibility of business meals since
the Tax Cuts and Jobs Act (TCJA)
removed the “directly-related” and
“associated with” business tests
(commonly referred to simply as
the “business entertainment tests”)
previously found in § 274.
In particular, there has been
significant debate as to whether
previously qualifying business meals
are allowed a 50 percent deduction
under the newly amended § 274.
Many believed that the retention
of references to “business meals”
in the amended § 274 supported
the continued deductibility of 50
percent of business meals. Others,
however, believed the removal of
the “business entertainment tests”
meant that business meals were
entirely nondeductible under the
TCJA. The naysayers rooted their
basis for nondeductibility, soundly,
in the IRS and Tax Court’s long-
standing position that business
meals must meet one of the
business entertainment tests in
order to be deductible. Logically,
the argument goes, the removal of
!
the tests under the TCJA meant
the removal of the deduction.
On October 3, the IRS put
this debate to rest when it issued
Notice 2018-76. The Notice
clarified that taxpayers generally
may continue to deduct 50 percent
of the food and beverage expenses
associated with operating their
trade or business, despite the
TCJA’s changes to the meal and
entertainment expense deduction
under § 274. Taxpayers can rely
on the guidance contained in
the Notice until the IRS issues
proposed regulations on the subject.
At the core of the analysis, the
IRS expounds that subsection k
of § 274 was not amended by the
TCJA. Section 274(k) does not
allow a deduction for the expense
of any food or beverages unless:
1) the expense is not lavish or
extravagant under the circum -
stances, and 2) the taxpayer (or
an employee) is present when the
food or beverages are furnished.
Section 274(n)(1), which was
amended under the TCJA,
provides that the amount
allowable as a deduction for any
expense for food or beverages
cannot exceed 50 percent of the
amount of the expense that
otherwise would be allowable.
Under the Notice, taxpayers may
continue to deduct 50 percent of
otherwise allowable business meals
if: 1) the expense is an ordinary
and necessary business expense
under § 162(a) paid or incurred
during the tax year when carrying
on any trade or business; 2) the
expense is not lavish or extravagant
under the circumstances; 3) the
taxpayer, or any employee, is
present when the food or beverages
are provided; 4) the food and
beverages are provided to a current
or potential business customer,
client, consultant, or similar
business contact; and 5) for food
or beverages provided during or
at an entertainment activity, they
must be
purchased
separately
from the
entertainment.
Author:
Matthew
Livesay - Phelps
Dunbar, LLP
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