Since TCJA passed last December, we have heard from a multitude of professionals with varying levels of concern regarding the continued existence of the food and beverage deduction in light of the fate of entertainment expenses. Well, Notice 2018-76, issued October 3, 2018, clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.

When taxpayers may deduct 50%

The Notice provides that taxpayers may deduct 50% of an otherwise allowable business meal expense if:

• The expense is an ordinary and necessary expense under §162(a) paid or incurred during the taxable year in carrying on any trade or business;
• The expense is not lavish or extravagant under the circumstances;
• The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
• The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
• In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.

Three examples follow to elucidate the premise

Example 1

Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.

The baseball game is entertainment as defined in Reg. § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the Code § 274(a)(1) disallowance.

Therefore, A may deduct 50% of the expenses associated with the hot dogs and drinks purchased at the game.

Example 2

Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.

The basketball game is entertainment as defined in Reg. § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the Code § 274(a)(1) disallowance.

Therefore, C may not deduct any of the expenses associated with the basketball game.

Example 3

Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.

As in Example 2, the basketball game is entertainment as defined in Reg. § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the Code § 274(a)(1) disallowance.

Therefore, C may deduct 50% of the expenses associated with the food and beverages provided at the game.

The takeaway here is relatively simple. Make sure your clients understand that separately invoiced food and beverages is the best practice. At the very least, make sure food and beverages are line-itemed separately on a common bill for, say, your client taking business contacts to the ballpark or concert. And keep it fair – don’t jack up the cost of the grub and drinks to offset a disallowed entertainment expense.

Interested in learning more? Sign up for our upcoming Food, Beverage, and Entertainment Expensing After Tax Reform (ELEX) webinar.

Nick Spoltore is VP of Tax & Advisory Content for Surgent CPE. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent, he practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.