Under prior law, a taxpayer could deduct 50% of (1) entertainment, amusement, or recreation expenses incurred for activities that were directly related to (or associated with) the active conduct of its trade or business, (2) a facility used in connection with such activity, or (3) business meals with clients or customers (Sections 274(a)(1) and (n)(1)). For amounts paid or incurred after December 31, 2017, unless otherwise noted below, the 2017 tax reform act (the Act) has eliminated the deduction for expenses related to entertainment, amusement, or recreational activities. However, the Act did not specifically address the deductibility of expenses for business meals. Notice 2018-76 provides transitional guidance on the deductibility of expenses for certain business meals under Section 274.
Under the Act, it was unclear whether the IRS would seek to deny deductions for business meals that were associated with nondeductible business entertainment with customers or clients. Notice 2018-76 eliminates this concern provided the requirements for deductibility listed within the Notice are met.
Taxpayers should begin to evaluate the impact of the Notice on business meals provided during entertainment activities, including those expenses incurred after December 31, 2017. Taxpayers also should begin creating new general ledger accounts or other documentation and recordkeeping procedures to properly account for such business meal expenses. Where feasible, taxpayers should request that vendors itemize future food and beverage expenditures separately from any entertainment.
Partner, Accounting Method and Fixed Asset Services Leader, PwC US