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IRS Addresses Deductibility of Meals as Business Expense

IRS guidance issued last month clarifies when advisors and other taxpayers can continue to deduct 50% of the cost of food or beverages conducted in the course of doing business.

Prior to enactment of last year’s Tax Cuts and Jobs Act (TCJA), taxpayers generally could deduct 50% of meal expenses and 50% of entertainment expenses that met the “directly related” or “business discussion” exceptions under Code Section 274. Section 274 was amended by the TCJA to disallow a deduction for entertainment expenses. However, the legislation did not specifically address the deductibility of expenses for business meals.

Accordingly, Section 274(n)(1) generally provides that amounts allowable as a deduction for any food or beverage expense cannot exceed 50% of the amount of the allowable expense. Thus, while entertainment expenses are no longer deductible, otherwise allowable meal expenses remain deductible, subject to the 50% limitation.

Where it gets a little complicated is that, while the TCJA did not change the definition of entertainment under Section 274(a)(1), it also did not address the circumstances in which food and beverages might constitute entertainment. The TCJA’s legislative history makes it clear, however, that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.

New Guidance

In Notice 2018-76, the Treasury Department and the IRS said they intend to propose regulations clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible expenses. Until future regulations become effective, taxpayers may rely on the guidance described in the notice.

Under the guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if five conditions are met:


  1. the expense is an ordinary and necessary expense under Section 162(a) paid or incurred during the taxable year in carrying on any trade or business;

  2. the expense is not lavish or extravagant under the circumstances;

  3. the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;

  4. the food and beverages are provided to a current or potential business customer, client, consultant or similar business contact; and

  5. in the case of food and beverages provided during an entertainment activity, either the food and beverages are purchased separately from the entertainment or their cost is stated separately from the cost of the entertainment on one or more bills, invoices or receipts.


The notice also advises that the entertainment disallowance rule may not be circumvented by inflating the amount charged for food and beverages. It also provides three examples describing the interaction between entertainment and meal expenses and the circumstances under which the 50% meals deduction may be taken by the taxpayer.

As they work on additional guidance, the Treasury Department and IRS are requesting comments concerning whether and what additional guidance is needed to clarify the treatment of entertainment expenses and business meal expenses. In particular, the agencies are interested in whether the definition of entertainment in Section 1.274-2(b)(1)(i) of the regulations should be revised; whether the objective test in section 1.274-2(b)(1)(ii) should be revised; and whether additional examples should be addressed in future guidance.

Comments are requested by Dec. 2, 2018. See the notice for details.

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