ASAP

IRS Issues Proposed Rule on Business Expense Deductions

By William Hays Weissman and Vincent K. Bates

February 27, 2020
2 minute read

On February 26, 2020, the IRS published proposed regulations implementing changes made by the Tax Cuts and Jobs Act of 2017 (TCJA) regarding the elimination of deductions for entertainment and the limitation on food and beverage expenses. The regulations largely track prior IRS guidance, Notice 2018-76, on these issues.

Internal Revenue Code (IRC) Section 274 generally limits employer deductions for meal expenditures and disallows deductions for entertainment expenditures. The proposed regulations apply the entertainment disallowance rule whether or not the activity is related to the taxpayer’s trade or business.¹ It also provides guidance on whether an activity should be considered entertainment. The proposed regulations, however, also provide that 50% of food and beverage expenses may be deducted if they are not “lavish or extravagant,” the taxpayer or a taxpayer’s employee is present, and the cost of the meal is stated separately.

The TCJA repealed heightened substantiation requirements for entertainment expenses under IRC Section 274. However, under the proposed regulations, traveling expenses for employees will remain subject to the IRC Section 274(d) substantiation requirements.² The proposed regulations also clarify that the exception for recreation that benefits employees under IRC Section 274 (e)(4) does not apply to free food or beverages provided in a break room, holiday party or company picnics. The IRS is also seeking comments on the standard for events where meals are provided to both employees and non-employee business associates.

Comments to the IRS on the proposed regulations are due by April 13, 2020, and a public hearing is scheduled for April 7, 2020.

¹ Subject to the 9 exceptions of IRC section 274(e): 1) Employee Food and Beverages, 2) Expenses Treated as Compensation, 3) Reimbursed Expenses, 4) Recreational Expenses for Employees, 5) Business Meetings, 6) Business League Meetings, 7) Items Made Available to the Public, 8) Entertainment Sold to Customers, and 9) Expenses Includible in Income of Non-Employees.

² No deduction allowed unless substantiated by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of the person receiving the benefit.