IRS Releases The Entertainment Expenses Chapter of Its Highly Anticipated TCJA ‘Rule Book’
Don’t let Federal tax rules discourage you from taking a client out to a baseball game this October during playoff season. The Internal Revenue Service has finally released guidance on the deductibility of expenses for business meals that are purchased within business, entertainment context.
Previously, under the old law, entertainment expenses were eligible for a 50 percent deduction of the cost if they were related to a business purpose. Now, under the new tax rules from the Tax Cuts and Jobs Act there isn’t any deduction allowed for expenses related to entertainment, amusement or recreation.
Needless to say, we had questions.
Listen to episode 155, “Wine ‘Em, Dine ‘Em … Just Don’t ‘Entertain’ ‘Em,” featuring Chris Axene on unsuitable on Rea Radio, Rea’s award-winning podcast.
Like, for example, when entertaining a client what happens when a meal is provided?
A 50 percent deduction is allowed for the expense of any food or beverage if meeting requirements to be considered a business meal expense. This means that, per IRC 162(a), certain requirements must be met, such as the expense should be considered ordinary and necessary, it’s not a lavish or extravagant expense under the circumstances, the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverage, the food and beverage is provided to a current or potential business client and, if provided during an entertainment activity, the food and beverage is a separate purchase from the entertainment.
Happily, the IRS has provided some examples of how this rule works.
Take, for example, you were to take a client out to a baseball game. You buy your ticket and your client’s ticket to the baseball game. This ticket cost is considered an entertainment expense, therefore it cannot be deducted. But if you buy you and your client a hot dog and beverage, separate from the baseball ticket, then the expense of the hot dog and beverage would be eligible for a 50 percent deduction as long as the other requirements are met.
On the other hand, if you buy baseball tickets that includes the cost of food and beverages, it may not be eligible for the deduction unless the purchase specifically separates the cost of the tickets from the food and beverage.
Don’t worry, this isn’t the last we will hear from the IRS on this particular matter. Additional guidance is to be released in the future through formal proposed regulations to clarify this rule.
In the meantime, feel free to take your client out to root for the home team. Just be sure to buy the peanuts and crackerjacks after you get to the game!
By Gabrielle Moore, JD, LLM (Dublin office)