Written by Myra Tunstall; Financial Strategist
Following the enactment of the Tax Cuts and Jobs Act of 2017 business owners had many questions regarding the deductibility of business meals and entertainment expenses for tax purposes. Numerous interpretations provided guidance, but on October 1, 2020 Internal Revenue Service issued a Final Rule, which should clear up any areas of uncertainty in the future.
Prior to the Tax Cuts and Job Act of 2017
Prior to the Tax Cuts and Jobs Act of 2017 (2017) businesses were generally allowed to deduct 50% of entertainment expenses if they could be shown to have been incurred while actively conducting business; otherwise, they were disallowed. Similarly, 50% of food and beverage expenses were considered deductible if they were incurred while doing business, were not extravagant and either the taxpayer or a taxpayer’s employee was present.
The Tax Cuts and Jobs Act of 2017
The TCJA abolished the deductibility of entertainment expenses even when they were directly related to the business. Unfortunately, TCJA was ambiguous as to the deductibility of business meals and in fall of 2018, Internal Revenue Service issued an explanatory notice detailing various situations under which business meals would continue to be deductible at the 50% rate, including business meals for employees traveling for work; however, even after the notice, questions remained. The explanatory notice became an acceptable interpretation until a final rule could be decided.
The Final Rule
Internal Revenue Service released a Final Rule effective October 9, 2020 with regards to treatment of the deductibility of expenses for entertainment and for meals. The Final Rule disallows a business deduction for most entertainment expenses and generally limits the deduction for food and beverages to 50% of qualifying, non-extravagant expenditures. The Final Ruling also upholds the application of a 50% limitation on food or beverages to very small (de minimis) fringe employee benefits and validates the requirement that taxpayer’s must separate deductible meals expense from nondeductible entertainment expenses.
For the complete Final Rule click here.
This notice is provided for informational purposes and is not intended to provide specific tax advice.