IRS proposes new rules for deducting meals and entertainment

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The Internal Revenue Service has released a set of proposed regulations for businesses to follow when deducting meals and entertainment, in response to the 2017 tax overhaul.

The Tax Cuts and Jobs Act got rid of the deduction for any expenses related to activities typically considered to be for entertainment, amusement or recreation. It also restricted the deduction for expenses related to food and beverages offered by employers to workers.

The regulations proposed Monday by the IRS aim to address the elimination of the deduction for expenditures related to entertainment, amusement or recreation activities and give guidance to figure out whether an activity is considered to be entertainment. The proposed rules also deal with the limitation on the deduction of food and beverage expenses.

The proposed regulations can have an impact on taxpayers who pay or incur expenses for meals or entertainment. The proposed rules mainly adhere to a notice that the IRS released in 2018, Notice 2018-76, spelling out transitional guidance on the deductibility of expenses for certain business meals.

“Initially many were concerned it was not clear that meals had not been included as part of entertainment, since in prior acts Congress had treated meals as a subset of entertainment,” wrote Ed Zollars of Kaplan Financial Education in his Current Federal Tax Developments blog. "But the IRS indicated in the preliminary guidance given in Notice 2018-76 that the agency did not believe the law barred deductions for most meals. The preamble to the proposed regulations confirm this treatment.”

The proposed rules note that while the Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses, Congress didn’t amend the provisions relating to the deductibility of business meals. That means taxpayers can generally continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business, including meals consumed by employees on work travel. However, as before the enactment of the TCJA, no deduction is permitted for the expense of any food or beverages unless the expense is not lavish or extravagant under the circumstances, and the taxpayer (or the taxpayer’s employee) is present while the food or beverages are being provided.

Taxpayers impacted by the change and others can send in comments on the proposed regulations. The IRS plans to hold a public hearing on these proposed regulations on April 7, 2020.

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