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Business Meals Are Still Partially Deductible, Treasury Says

Posted on Oct. 1, 2020

The IRS and Treasury have issued final rules on the deductibility of entertainment expenses that still allow for partial write-offs of business meals.

Final regulations (T.D. 9925) released September 30 say Treasury has the authority to allow taxpayers to claim partial deductions for business meals, despite what some tax professionals have argued.

“The Treasury Department and the IRS believe that the final regulations provide a rule that is legally supportable and that draws a clear line between meals and entertainment that taxpayers can understand and the IRS can administer,” the regs say.

After the Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses, the deductibility of business meals came into question. But in Notice 2018-76, 2018-42 IRB 599, and subsequent proposed regs, the IRS said business meals would still be 50 percent deductible as long as specific requirements are met.

A group of federal income tax law professors argued against allowing the meals deduction in an April 12 letter, saying the proposed regs (REG-100814-19) would “encourage manipulative pricing and waste scarce governmental and private resources in pursuit of a non-existent distinction between different kinds of entertainment.”

The professors argued that entertainment “clearly encompasses many of the business meals authorized in the Proposed Rule,” and that while not all meals constitute entertainment, the understanding of section 274 since its enactment in 1962 is that meals count as entertainment when they’re for the individual’s personal enjoyment.

The final rules provide that for purposes of section 274(a), the term “entertainment” doesn’t include food or beverages unless they’re provided at or during an entertainment activity and the costs aren’t separately stated from the entertainment costs, the IRS said.

“The Treasury Department and the IRS acknowledge that, prior to the TCJA, some meals were considered to be entertainment. However, prior to the TCJA, neither section 274 nor the regulations under section 274 attempted to define meal expenses or to distinguish meal expenses from entertainment expenses,” the IRS said.

The IRS said the existing regulatory definition of entertainment relies upon an objective test to determine whether an activity is generally considered entertainment, and providing that business meals aren’t generally considered entertainment “results in an administrable rule that does not depend on subjective factors such as whether the taxpayer enjoys the business meal.”

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