Entertainment Expenses

On October 9, the IRS published final Treasury Regulations addressing the deduction disallowance of expenses associated with providing entertainment, business meals, and other food and beverages in the Federal Register.  The final regulations, which track the proposed regulations published on February 26, 2020, preserve, with certain limitations, taxpayers’ ability to deduct 50 percent of the cost of business meals, even though the Tax Cuts and Jobs Act (“TCJA”) repealed the directly related and business discussion exceptions to the general prohibition on deducting entertainment expenditures.  Treasury Regulation § 1.274-11 addresses the deduction disallowance under Section 274(a)(1) for entertainment costs.  Treasury Regulation § 1.274-12 addresses the limitations on food or beverage expenses under Sections 274(k) and (n), including the application of exceptions in Section 274(e).

The TCJA’s elimination of a taxpayer’s ability to deduct 50 percent of meal and entertainment expenses meeting the directly related and business discussion exceptions took effect for tax years beginning after December 31, 2017.  In 2018, IRS Notice 2018-76 provided transitional guidance on the deductibility of expenses for certain business meals and other food and beverage expenses under Section 274(a)(1).  The proposed regulations largely adopted the guidance provided in Notice 2018-76, while also providing some significant updates.  The final regulations made only a few substantive changes to the proposed regulations.Continue Reading Final Regulations Address TCJA Disallowance for Meal and Entertainment Expenses

Earlier today, the Senate Finance Committee released legislative text of its version of the Tax Cuts and Jobs Act.  Up until now, only “conceptual language” had been available.  The text clarifies some of the provisions that we have previously discussed in our posts about the Senate bill (see earlier discussion here) and includes new information reporting requirements that we have not previously covered:

  • The legislative text would disallow any deduction for meals provided at the convenience of the employer and meals provided in an “employer-operated eating facility.” If the employer chooses to offer food and beverages, they will remain excludable (to the extent currently excludable) from the employee’s income and wages under section 132, but the cost of providing them would not be deductible.  It is somewhat unclear what the effect of the deduction disallowance would be with respect to employer-operated eating facilities that collect sufficient revenue to cover their operating expenses.  Arguably, the provision could result in the employer recognizing revenue for the food and beverages sold to employees in the facility but having no deduction for the costs associated with selling food and beverages.  (Update: Upon further thought, we believe that the employer would not lose the deduction to the extent the employees pay for food and beverages purchased from the employer-operated eating facility because only the value of such food and beverages in excess of the amount paid is excludible from income under Code section 132(e) as a deminis fringe benefit.)  The new total deduction disallowance would be repealed for taxable years beginning after December 31, 2025, provided government revenue exceeds a target during the period 2018 through 2026.  The provision is effective if the cumulative on-budget Federal revenue from all sources for the 2018 through 2026 government fiscal years exceeds $28.387 trillion.
  • As expected, the text would eliminate the exclusion for bicycle commuting reimbursements, but in a surprise, the elimination is only temporary. The bill adds a new Code section 132(f)(8), which suspends the availability of section 132(f)(1)(D) from 2018 through 2025.  The exclusion would become available again in 2026.  This suggests that the Finance Committee’s decision to eliminate this exclusion may be driven more by revenue demands than by policy considerations, as it helps ensure the reconciliation bill meets the revenue target within the budget window.

Continue Reading Senate Tax Reform Legislative Text Clarifies Some Provisions

Yesterday, the House Ways and Means Committee released the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), a bill that, if enacted, would represent the most substantial overhaul of the U.S. tax code in decades.  Section 3307 of the Bill makes several changes to the deduction limitations under section 274 related to meals and entertainment expenses.  The Bill also expands the reach of the deduction limitations to disallow deductions for de minimis fringe benefits excluded from income under Code section 132(e), unless the employer includes such amounts in the employee’s taxable income. With respect to tax-exempt entities, section 3308 of the Bill would treat funds used to provide employees transportation fringe benefits and on-premises gyms and other athletic facilities as unrelated business taxable income.

Total Disallowance of Deductions for Entertainment Expenses.  Under Code section 274(a), a taxpayer may not deduct expenses for entertainment, amusement, or recreation (“entertainment expenses”), unless the taxpayer establishes that the item was directly related to the active conduct of the taxpayer’s business, subject to a number of exceptions in Code section 274(e) (e.g., reimbursed expenses; expenses treated as compensation to (or included in the gross income of) the recipient; recreational, social, and similar activities primarily for the benefit of employees other than highly compensated employees; entertainment sold to customers).  If the taxpayer establishes that the entertainment expenses were directly related to the active conduct of its trade or business, section 274(n) limits the deduction to 50 percent of expenses relating to entertainment, subject to a number of exceptions, many of which are the same exceptions that apply to the 100 percent disallowance under Code section 274(a) (e.g., reimbursed expenses; expenses treated as compensation to (or included in the gross income of) the recipient; recreational, social, and similar activities primarily for the benefit of employees other than highly compensated employees; entertainment sold to customer).

The Bill would amend section 274(a) to eliminate the exception for entertainment expenses directly related to the active conduct of the taxpayer’s business.  Accordingly, deductions for entertainment expenses would be fully disallowed unless one of the exceptions under Code section 274(e) applies.  The Bill would also make changes to some of the exceptions under Code section 274(e), described below.
Continue Reading Impact of Tax Cuts and Jobs Act: Part II – Deduction Disallowances for Entertainment Expenses and Certain Fringe Benefits