AICPA Seeks Guidance on Meals and Entertainment Deductions

April 2, 2018

The Honorable David J. Kautter
Assistant Secretary for Tax Policy
Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220

Mr. William M. Paul
Acting Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Re: Request for Immediate Guidance Regarding IRC Section 274 — Disallowance of Certain Entertainment, Etc., Expenses (Pub. L. No. 115-97, Sec. 13304)

Dear Messrs. Kautter and Paul:

The American Institute of CPAs (AICPA) respectfully requests that the Department of the Treasury (“Treasury”) and the Internal Revenue Service (IRS) provide immediate guidance on the changes to Internal Revenue Code (IRC or “Code”) section 274 as enacted under Pub. L. No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA) related to the disallowance of entertainment, amusement, recreation and qualified transportation fringe expenses. Taxpayers require clarification in order to account for the changes in deductibility of these items and revise their accounting systems and expense and reimbursement policies and to comply with them on their 2018 tax returns and financial statements.

Specifically, the AICPA recommends that Treasury and the IRS provide guidance on the following issues related to the changes to section 274:

The AICPA is the world's largest member association representing the accounting profession with more than 418,000 members in 143 countries and a history of serving the public interest since 1887. Our members advise clients on federal, state and international tax matters and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America's largest businesses.

We appreciate your consideration of these comments and welcome the opportunity to discuss these issues further. If you have any questions, please contact me at (408) 924-3508, or annette.nellen@sjsu.edu; Kathy Petronchak, Chair, AICPA Meals and Entertainment Task Force, at (713) 548-2281, or kathy.petronchak@alliantgroup.com; or Kristin Esposito, Senior Manager — AICPA Tax Policy & Advocacy, at (202) 434-9241, or kristin.esposito@aicpa-cima.com.

Sincerely,

Annette Nellen, CPA, CGMA, Esq.
Chair, AICPA Tax Executive Committee
Washington, DC

cc:
The Honorable David J. Kautter, Acting Commissioner, Internal Revenue Service
Mr. Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation
Mr. Robert Neis, Benefits Tax Counsel, Department of the Treasury
Mr. Stephen LaGarde, Attorney-Advisor, Office of Benefits Tax Counsel, Department of the Treasury
Mr. Christopher W. Call, Attorney-Advisor (Tax Legislation), Office of Tax Policy, Department of the Treasury
Ms. Veena Murthy, Legislation Counsel, Joint Committee on Taxation

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AMERICAN INSTITUTE OF CPAs

Request for Immediate Guidance Regarding IRC Section 274 — Disallowance of Certain Entertainment, Etc., Expenses (Pub. L. No. 115-97, Sec. 13304)

Developed by the AICPA Meals and Entertainment Task Force

Kathy Petronchak, Task Force Chair
Jeffrey Allen
Larry Carlton
Karen Field
Daniel Moore
Ken Rubin
Jerry Schreiber
Kristine Wolbach

Kristin Esposito, Senior Manager — AICPA Tax Policy & Advocacy

April 2, 2018

I. Client-Related Business Meals

Overview

It is a common business practice for a taxpayer to incur expenditures for food and/or beverages furnished outside of a formal office or business setting. Generally, the participants in the meal are actively engaged in business discussions or negotiations. These expenses are primarily incurred for the purpose of furthering the taxpayer's trade or business and not for social or personal reasons.

Prior to the enactment of Pub. L. No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (TCJA), under Internal Revenue Code (IRC or “Code”) section 274(k),¹, ² taxpayers were entitled to a 50% deduction for expenses related to business meals that were not lavish or extravagant under the circumstances and the taxpayer or an employee of the taxpayer was present.

Per section 274(a)(1)(A),³ entertainment expenses associated with a taxpayer's trade or business are no longer deductible under the TCJA, which has caused taxpayer confusion as to the deductibility of business meals. Therefore, taxpayers require definitive assurance that the deductibility of business meals are not limited due to the changes to section 274(a)(1)(A).

1. With Current and Prospective Clients Incurred at Times Other Than Before, During or After an Entertainment Event

Recommendation

The American Institute of CPAs (AICPA) requests that the United States Department of the Treasury (“Treasury”) and the Internal Revenue Service (IRS) confirm that business meals, which (1) take place between a business owner or employee and a current or prospective client; (2) are not lavish or extravagant under the circumstances; and (3) where the taxpayer has a reasonable expectation of deriving income or other specific trade or business benefit from the encounter, are not disallowed under section 274(k).

Analysis

Due to the significant number of taxpayers who in the normal course of business, have business-related discussions in a non-formal setting where food and beverages are furnished, it is critical that taxpayers receive immediate confirmation that business meals between a taxpayer (or employee of the taxpayer) and current or prospective clients are not disallowed under section 274(k).

The following examples illustrate scenarios⁴ in which the deduction under section 162 should continue to apply without disallowance pursuant to section 274(k):

2. With Current or Prospective Clients Incurred Before, During or After an Entertainment Event

Recommendation

The AICPA recommends that Treasury and the IRS provide guidance stating that business meals, which are separately charged while a taxpayer or an employee of the taxpayer attends an entertainment event, remain 50% deductible under the rules of sections 274(n) and 162.

Analysis

A significant number of taxpayers in the normal course of business extend business-related discussions to a setting which includes elements of both business and entertainment. It is critical that taxpayers have immediate confirmation that business meals furnished to current and prospective clients before, during or after an entertainment event remain allowable deductions under section 162 pursuant to the rules of section 274(n) if separately charged either on one or more bills/invoices. If the cost of the meals is not separately charged and is included in the total cost of the event venue, then it should not qualify as a deduction as a business meal.

The following examples illustrate scenarios which should remain deductible under section 162, pursuant to the rules of 274(n):

II. Employer-Provided Business Meals

1. Related to Restaurant and Food Service Workers

Overview

It is a common business practice for employers of restaurant and food service workers to provide meals, served on its business premises, at no cost or at a discount, to their employees, for the convenience of the employer. Prior to the enactment of the TCJA, the value of such a meal was 100% deductible to the employer.

Upon enactment of the TCJA, section 274(n)⁵ limits the deduction for employer-provided meals under section 119 to 50% of the amount paid from 2018 through 2025 and new section 274(o)⁶ disallows such deductions after December 31, 2025.

Recommendation

The AICPA recommends that for administrative convenience and ease of compliance, Treasury and the IRS provide a safe harbor method for an employer to calculate the nondeductible portion of the cost of food or beverages provided at no cost or at a discount to their employees who are required to remain on the business premises. An example of a possible safe harbor is a flat dollar amount per employee, similar to the existing per diem rules which vary by geographic location and season.

Analysis

In order to comply with the changes to the deductibility of employer-provided meals, employers must track the cost of the meal to ensure that only 50% of the cost of the meal is deducted from 2018-2025 and that no tax deduction is taken beginning in 2026. The application of a safe harbor method will facilitate compliance with the new rules.

2. Definition of Facility

Overview

It is a common business practice for employers to serve meals to their employees at an employer-provided eating facility. Previously, an employer was entitled to a deduction of 100% of the cost of such meals if they were for the convenience of the employer.

Under section 274(n) of the TCJA, meals are 50% deductible after December 31, 2017. Also, per new section 274(o) employer-provided meals are non-deductible after December 31, 2025, including the costs of the eating facility.

Recommendations

The AICPA recommends that Treasury and the IRS define the term “facility” for purposes of new section 274(o). We suggest continuing to use the Treas. Reg. § 1.132-7(a)(2) definition of “employer-operating eating facility” for this purpose.

The AICPA also suggests providing an exception to section 274(o) for facilities in which over 90% of the meals are provided to employees of an employer while the employees are traveling away from home overnight and are otherwise deductible meal expenses.

Analysis

An exception is appropriate in the case of an employer-provided training or conference facility containing an on-site cafeteria where over 90% of the meals are served to employees or others who are traveling overnight away from home. Since employee business travel is involved, the employer is otherwise entitled to deduct 50% of the cost of the reimbursement of the employee meals if the employee eats at a restaurant other than one that is employer-provided. The deduction should continue if the employee eats at the employer-provided facility.

III. Employer-Provided Snacks and Other Food Products

Overview

It is a common business practice for employers to provide its employees coffee, soft drinks, bottled water and snacks on its business premises. These snacks are often provided in a pantry, break room or copy room. Under prior law, the value of employer-provided snacks and beverages was 100% deductible to the employer under the rules of section 274(e)(1) and 274(n)(2)(B).

Upon enactment of the TCJA, under the rules of section 274(n),⁷ certain employer-provided meals are 50% deductible from 2018 through 2025. Meals provided in employer operated eating facilities (described in section 132(e)(2)) or for the convenience of the employer (as described in section 119, under new section 274(o))⁸ are non-deductible after December 31, 2025. Expenses for recreational, social or similar activities are not subject to these new disallowances. However, it is unclear whether the employer beverage and snack expenses meet the exception and are 100% deductible, 50% deductible as food or beverages provided under the de minimis rules or disallowed under section 274(o).

Since providing snacks and beverages to employees is a common business practice to enhance worker morale and productivity, businesses need clarity as to the deductibility of these expenses.

Recommendations

The AICPA recommends that Treasury and the IRS confirm that snacks and beverages provided to employees in break rooms, pantries or copy rooms are 50% deductible under section 274(n)(1). Alternatively, the section 274(e)(4) exception to the section 274(n) rules may apply, which would entitle the employer to a 100% deduction.

The expenses related to employee snacks and beverages are not taxable compensation as de minimis fringe benefits. Since the snacks are sometimes provided in situations (e.g., break rooms) where employees are socializing, the section 274(e)(4) exception for recreational type employee expenses may also apply in certain circumstances, making the expenses 100% deductible.

Analysis

The changes to section 274(n) and the addition of section 274(o) by the TCJA have created questions related to the deduction of employer-provided snacks and beverages provided to employees in locations other than an employer provided eating facility as described in section 132(e)(2). Therefore, we request guidance regarding the deductibility of these amounts.

IV. Employer-Hosted Recreational, Social and Similar Activities

Overview

Many employers host recreational, social, and similar activities for their employees and their families (e.g., holiday parties, picnics, etc.) to show employee appreciation, boost morale and help employees get to know each other better. Oftentimes, companies take the opportunity at these “all employee” events to showcase business, individual or team accomplishments.

Under prior law pursuant to section 274(e)(4),⁹ an employer-provided social or recreational event was not limited by section 274(n) and the employer was entitled to deduct 100% of the costs incurred to host a recreational, social or similar event as long as the activity was open to all employees and did not discriminate in favor of highly compensated employees.

While section 274(e)(4) remains in place, per section 274(a)(1)(A), entertainment expenses are no longer deductible under the TCJA. The loss of deductibility of entertainment expenses is triggering questions as to the deductibility of expenses related to an employer-provided social outing for their employees.

Recommendation

The AICPA recommends that the IRS confirm that certain expenditures (e.g., meals, venue, and related entertainment) incurred by an employer in hosting a holiday party or similar activity for their employees and employees' families remain 100% deductible pursuant to the section 274(e)(4) exception to the section 274(n) rules.

Analysis

Although section 274(e)(4) was not changed by the TCJA, the loss of deductibility of entertainment expenses has created uncertainty as to the continued deduction of these types of expenditures. Therefore, taxpayers require definitive assurance that the deductibility of expenditures (e.g., venue, contracted entertainment) related to hosting a recreational, social or other similar activity are not limited by section 274(a)(1)(A), which was changed by the TCJA.

The following example illustrates a scenario in which the costs associated with an employer-hosted event should remain deductible to the employer under section 274(e)(4):

V. Advertising

Overview

It is common for a business to advertise using a variety of methods in order to promote its products and/or services. There are times when an advertising activity is integrated with an entertainment event.

Prior to the passage of the TCJA, advertising expenses integrated with an entertainment event were deductible under section 162(a). However, since the TCJA disallows the deductibility of entertainment expenses, there is taxpayer confusion as to the continued deductibility of advertising expenses that are associated with an entertainment event.

Recommendation

The AICPA requests that Treasury and the IRS confirm that the treatment of expenditures for advertising, although related to an entertainment event, remain deductible under section 162.

Analysis

Under section 162(a), taxpayers are allowed a deduction for all of the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. A taxpayer can generally deduct reasonable advertising expenses that are directly related to its business activities. These expenditures, while primarily directed toward current sales of a taxpayer's product are considered ordinary within the meaning of section 162 and are not capitalized even though some lasting benefit is incidental to the advertising program.

The amounts specified for advertising costs as part of an otherwise non-deductible entertainment expense should remain deductible regardless of the current language in Treas. Reg. § 1.274-2(b)(1)(ii)¹⁰ concerning the definition of entertainment.

The following example illustrates a scenario for which the advertising expenses should remain deductible under section 162, although an element of entertainment exists:

VI. Charitable Contributions

Overview

The sponsorship of charitable events represents a significant funding source for qualified nonprofit organizations and an important marketing strategy for businesses. The identification with a charitable activity is valuable to businesses seeking to boost publicity, to expand markets, and to enhance its image as a supporter of its community in the field of sports, arts, music, and/or cause-related events.

A business is entitled to deduct payments made for sponsorship of a charitable activity if the expenditure meets the profit motive tests under section 162, which allows deductions for ordinary and necessary trade or business expenses paid or incurred during a taxable year. Additionally, under section 170, payments made by a taxpayer to a nonprofit organization are deductible under the rules for charitable contributions. Therefore, there are situations when a donor who makes a contribution to a nonprofit organization is entitled to a deduction under section 162(a) rather than under section 170.

Since the TCJA disallows the deductibility of entertainment expenses, there is uncertainty as to the continued deductibility of expenses related to charitable sponsorships when an element of entertainment is present.

Recommendations

The AICPA recommends that Treasury and the IRS provide guidance stating that when a business makes a charitable contribution to a nonprofit organization in support of a charitable event, the contribution qualifies as an advertising expense under section 162(a) and is not limited by the charity's actual use of the funds for expenditures in support of the event (e.g., to pay for an entertainment venue or performers).

The AICPA also recommends that the entire contribution to the charity qualifies as a deductible expense when the donor otherwise meets the test of business purpose under section 162(a).

Analysis

The costs incurred by businesses in support of charitable events are often substantial. Although section 162 and section 170 were not changed by the TCJA, taxpayers require confirmation that expenses incurred by a business in relation to a charitable sponsorship in which an element of entertainment is present, remain deductible under section 162(a).

VII. Qualified Transportation

Overview

Many employers provide transportation benefits (e.g., parking, transit passes, etc.) to their employees, the value of which is often excludable from the employees' income under section 132(f). Prior to the enactment of the TCJA, an employer was entitled to deduct certain expenses related to the value of providing its employees with parking or transit passes by paying for qualified transportation directly, allowing employees to make salary reduction contributions to pay for it, or a combination of both.

Under the TCJA, section 274(a)(4) disallows the deduction of expenses associated with the section 132(f) qualified transportation exclusion. If the employer provides free parking to employees or allows them to pay for parking with pre-tax salary reduction amounts, the employee exclusion will apply, nevertheless, the expenses are no longer deductible to the employer.

Under Treas. Reg. § § 1.61-21(a) and (b) and section 132(f), if the fair market value (FMV) of parking or transit provided by an employer to its employees is above the section 132(f) limits, the employee is taxed on the value of the qualified parking benefit received less the excludible amounts.

Under Treas. Reg. § 1.162-25T, when an employer provides a fringe benefit to an employee and the cost to the employer is lower than the FMV of the benefit to the employee, the employer is only entitled to take a deduction up to the cost of providing the benefit. For example, if an employer owns a parking lot in an area where the FMV of parking is $100 per month and the costs of owning and maintaining the parking lot is $40 per month, Treas. Reg. § 1.162-25T limits the employer's deduction to the costs of providing the benefit, rather than allowing the employer to claim a deduction equal to the FMV of the benefit to the employee.

If the employer purchases parking space or transit passes at FMV, it appears that the loss of the deduction is limited to the section 132(f) amount, since any amount above the section 132(f) amount is considered taxable compensation to the employee.

Taxpayers need clarification as to the limitation on deductibility of transportation expenses where section 132(f) provides for a salary reduction arrangement (e.g., the employee elects to reduce salary by $100 per month under section 132(f) to pay for the use of the parking lot, while the employer's cost to provide the benefit is $40 per month).

Recommendations

The AICPA recommends that Treasury and the IRS provide guidance related to the calculation of the loss of the transportation deduction, including the rules under Treas. Reg. § 162-25T, due to the changes in section 274(a)(4), as follows:

Analysis

The TCJA made changes to the deductibility of transportation expenses under section 274(a)(4) that require further clarification. We provide the following examples to illustrate:

VIII. Transportation and Commuting

Overview

Many employers cover a part or all of their employees' transportation and commuting costs related to travel between the employee's residence and place of employment. Under prior law, these costs were deductible by the employer under section 162 and nontaxable to the employee up to certain dollar limits as qualified transportation fringe benefits.

New section 274(l), under the TCJA repealed an employer's deductions for the expenses incurred for providing transportation, payment or reimbursement to the employee, in connection with travel between the employee's residence and place of employment. There is an exception in section 274(l)(1) for expenses paid that are necessary for ensuring the safety of the employee.

Under Treas. Reg. § 1.132-6(d)(ii), occasional transportation from work to home, generally during overtime hours, paid or reimbursed by the employer is excluded from an employee's income (e.g., an employee usually takes the train but occasionally works beyond 9:00 pm, and on those days the employer pays for their alternative transportation expenses for commuting home). The amount paid by the employer is excluded from the employee's income and is generally viewed as being provided for safety reasons.

Additionally, Treas. Reg. § 1.132-6(d)(iii) provides that where an employer location is in an unsafe area (determined based on the crime statistics), the employer can provide routine transportation from the employer's worksite to another location (such as a transit station), and the employees are charged, or have imputed taxable income, of $1.50 per ride. However, the remaining costs of the transportation are tax-free to the employees. The amount paid by the employer is also viewed as a safety exception.

Finally, under Treas. Reg. § 1.61-21, where the employer pays for an employee's commute that is not excluded under section 132, the FMV of the benefit provided is treated as taxable compensation.

It is unclear whether section 274(l) applies to limit the tax deduction when employee commuting expenses are included in the employee's taxable compensation. It is also unclear when and how the safety rules apply.

Recommendations

The AICPA requests that Treasury and the IRS clarify that to the extent an employer includes the value of employee commuting costs in the employee's taxable compensation, the amount included in employee taxable income is tax deductible as compensation (similar to the section 1.132-5(t) regulations providing for a tax deduction for the costs of spousal travel, provided the employer timely includes the cost of spousal travel in the employee's taxable compensation).

The AICPA also requests that Treasury and the IRS clarify the meaning of the language in section 274(l)(1), “except as necessary for ensuring the safety of the employee.” We suggest tying the definition of the term to the language in Treas. Reg. § § 1.132-6(d)(2)(ii)¹¹ and (iii) and to the extent that amounts are excluded from income under these sections, the amounts remain fully tax deductible.

Likewise, to the extent that an employee is under an independent security study demonstrating business-oriented security concerns (following the requirements of Treas. Reg. § 1.132-5(m)), the cost of providing transportation from the home to the office pursuant to the recommendations in the security study are “necessary for ensuring the safety of the employee” and thus still deductible.

The AICPA also suggests that Treasury and the IRS provide guidance on the implementation of section 274(l) in general.

Analysis

Currently, there is an exception from the general rule for employers that incur transportation or commuting expenses while ensuring the safety of their employees. However, the language, “except as necessary for ensuring the safety of the employee,” without specific examples, is challenging for taxpayers to implement.

The existing language in Treas. Reg. § 1.132-6(d)(2)(ii) and Treas. Reg. § § 1.132-6(d)(2)(iii)(A),¹² (B)¹³ and (C)¹⁴ provide guidance that Treasury and the IRS should consider as the basis for the implementation of new section 274(l)(1) and to clarify the term “safety of the employee.” A narrower interpretation of 274(l)(1) could conflict with the existing de minimis fringe benefit rules, place unnecessary recordkeeping requirements on taxpayers, and penalize those subject to it.

The following examples illustrate scenarios in which the cost of transportation incurred is for the “safety of the employee” and should qualify as deductible to the employer per Treas. Reg. § 1.132-6(d)(2)(ii) and Treas. Reg. § § 1.132-6(d)(2)(iii)(A), (B), and (C):

IX. Membership Dues

Overview

Many professionals join business leagues, trade associations and other professional organizations (e.g., American Institute of CPAs) to enhance their professional development by widening their network, keeping up to date on the latest industry innovations, research and trends, and furthering their career. They also join civic-minded organizations such as the Kiwanis and Rotary clubs, to give back to their community or serve others. In order to join an organization, a participant is generally required to pay membership dues.

The TCJA repealed section 274(a)(2)(c), which allowed a deduction for club dues if the taxpayer established that the facility was used primarily for the furtherance of the taxpayer's trade or business and the item was directly related to the active conduct of the trade or business. The repeal of this section has created confusion among taxpayers as to whether Treas. Reg. § 1.274-(2)(a)(2)(iii) and Treas. Reg. § 1.274-(2)(a)(2)(iii)(b) still apply to the deductibility of dues paid for memberships to civic organizations.

Treasury Reg. § 1.274-(2)(a)(2)(iii) disallows a deduction for membership fees to clubs organized for business, pleasure, recreation, or other social purpose. Treasury Reg. § 1.274-(2)(a)(2)(iii)(b) provides an exception to the disallowance of the deduction for business leagues, trade associations, chambers of commerce, boards of trade, real estate boards, professional organizations (such as bar associations and medical associations), and civic or public service organizations.

Recommendation

The AICPA requests that Treasury and the IRS confirm that the treatment of membership dues for 501(c)(4) civic organizations such as the Kiwanis and Rotary clubs and other business organizations under Treas. Reg. § 1.274-(2)(a)(2)(iii) as well as the list of related exceptions under Treas. Reg. § 1.274-(2)(a)(2)(iii)(b) have not changed under the TCJA.

Analysis

A significant number of professionals pay membership dues to one or more professional or civic type organizations. Taxpayers require confirmation that the dues paid to certain organizations remain deductible after the passage of the TCJA.