IRS Publishes Final Regs on Business Expenses

IRS Publishes Final Regs on Business Expenses

Internal Revenue Service

The IRS has published final regulations (T.D. 9925) that address the elimination of the deduction under section 274 for expenditures regarding entertainment, amusement, or recreation activities, and provide guidance to determine whether an activity is generally considered to be entertainment. The final regs adopt, with changes in response to some comments, proposed regs (<a href="/lr/resolve//2c6nc">REG-100814-19</a>) issued in February 2020. The final regs restate the statutory rules under section 274(a), including the application of the entertainment deduction disallowance rule to dues or fees to any social, athletic, or sporting club or organization. The regs incorporate the existing regulatory definition of entertainment with minor changes to remove outdated language. For purposes of section 274(a), the term “entertainment” does not include food or beverages unless they are provided at or during an entertainment activity and the costs of the food or beverages are not separately stated from the entertainment costs. The final regs don’t affect the application of the special rules in reg. section 1.274-10 to expenses for aircraft used for entertainment. The final regs confirm that the nine exceptions in section 274(e) continue to apply to entertainment expenditures otherwise disallowed by section 274(a). The final regs substantially incorporate the guidance in <a href="/lr/resolve//28h24">Notice 2018-76</a> to distinguish between entertainment expenditures and food or beverage expenses in the context of business meals provided at or during an entertainment activity. The regs also generally apply the guidance in Notice 2018-76 to all food or beverages, including travel meals and employer-provided meals, provided at or during an entertainment activity. The regs also clarify the rules applicable to food or beverages provided at or during an entertainment activity. Regarding business meal expenses, the final regs provide that the expenses must not be lavish or extravagant under the circumstances and that the taxpayer or an employee of the taxpayer must be present when the food or beverages are furnished. The regs also address the general requirement in <a href="/lr/resolve//28h24">Notice 2018-76</a> that the food and beverages be provided to a business contact, adopting the proposed definition of a business associate. The final regs adopt the proposed rule providing that generally 50 percent of expenses for business meals are deductible. The regs modify some examples in response to comments to address the treatment of expenses for food and beverages provided to attendees at a business meeting. The regs incorporate other changes to clarify that the 50 percent deduction applies to food and beverages provided to the taxpayer (or an employee of the taxpayer), as well as a business associate or another person. The regs also address when a sole proprietor may deduct 50 percent of food or beverage expenses. The final regs are intended to provide comprehensive rules for food and beverage expenses, and thus apply the general rules for meal expenses from <a href="/lr/resolve//28h24">Notice 2018-76</a> and the proposed regs to travel meals. The regs also incorporate the substantiation requirements in section 274(d) to meals during travel. The regs apply the limitations in section 274(m)(3) to expenses for food or beverages paid or incurred while on travel for spouses, dependents, or other individuals accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel. The final regs provide that the deduction limitation rules generally apply to all food and beverages, whether characterized as meals, snacks, or other types of food or beverage items. Further, unless one of six exceptions applies, the deduction limitations apply regardless of whether the food or beverages are treated as de minimis fringe benefits under section 132(e). The final regs address the limitation on the deduction of food and beverage expenses under section 274(k) and (n), including the applicability of the exceptions under section 274(e)(2), (3), (4), (7), (8), and (9). Regarding the exceptions for expenses treated as compensation under section 274(e)(2) or (e)(9), the regs incorporate changes in response to comments that the “all-or-nothing” rule included in the proposed regs was unduly harsh. Treasury and the IRS believe the rules in the final regs avoid the unduly harsh result that could arise by prohibiting application of section 274(e)(2) or (e)(9) when a taxpayer includes some, but not all, of the value of a food or beverage expense in the recipient’s income. Regarding non-specified individuals, the regs provide rules for deducting food or beverage expenses under the exception in section 274(e)(2) or (e)(9). The regs also include a provision for specified individuals addressing the application of those exceptions.

Related IRS <a href="/lr/resolve//2d0m3">news release</a>.

At 85 FR 82355, December 18, 2020, the IRS made <a href="/lr/resolve/corrections/2db3d" title="corrections">corrections</a> to the following Treasury Decision and have been incorporated below.

The IRS has published final regulations (T.D. 9925) that address the elimination of the deduction under section 274 for expenditures regarding entertainment, amusement, or recreation activities and provide guidance to determine whether an activity is generally considered to be entertainment.

The IRS has published final regulations (T.D. 9925) that address the elimination of the deduction under section 274 for expenditures regarding entertainment, amusement, or recreation activities, and provide guidance to determine whether an activity is generally considered to be entertainment. The final regs adopt, with changes in response to some comments, proposed regs (REG-100814-19) issued in February 2020. The final regs restate the statutory rules under section 274(a), including the application of the entertainment deduction disallowance rule to dues or fees to any social, athletic, or sporting club or organization. The regs incorporate the existing regulatory definition of entertainment with minor changes to remove outdated language. For purposes of section 274(a), the term “entertainment” does not include food or beverages unless they are provided at or during an entertainment activity and the costs of the food or beverages are not separately stated from the entertainment costs. The final regs don’t affect the application of the special rules in reg. section 1.274-10 to expenses for aircraft used for entertainment. The final regs confirm that the nine exceptions in section 274(e) continue to apply to entertainment expenditures otherwise disallowed by section 274(a). The final regs substantially incorporate the guidance in Notice 2018-76 to distinguish between entertainment expenditures and food or beverage expenses in the context of business meals provided at or during an entertainment activity. The regs also generally apply the guidance in Notice 2018-76 to all food or beverages, including travel meals and employer-provided meals, provided at or during an entertainment activity. The regs also clarify the rules applicable to food or beverages provided at or during an entertainment activity. Regarding business meal expenses, the final regs provide that the expenses must not be lavish or extravagant under the circumstances and that the taxpayer or an employee of the taxpayer must be present when the food or beverages are furnished. The regs also address the general requirement in Notice 2018-76 that the food and beverages be provided to a business contact, adopting the proposed definition of a business associate. The final regs adopt the proposed rule providing that generally 50 percent of expenses for business meals are deductible. The regs modify some examples in response to comments to address the treatment of expenses for food and beverages provided to attendees at a business meeting. The regs incorporate other changes to clarify that the 50 percent deduction applies to food and beverages provided to the taxpayer (or an employee of the taxpayer), as well as a business associate or another person. The regs also address when a sole proprietor may deduct 50 percent of food or beverage expenses. The final regs are intended to provide comprehensive rules for food and beverage expenses, and thus apply the general rules for meal expenses from Notice 2018-76 and the proposed regs to travel meals. The regs also incorporate the substantiation requirements in section 274(d) to meals during travel. The regs apply the limitations in section 274(m)(3) to expenses for food or beverages paid or incurred while on travel for spouses, dependents, or other individuals accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel. The final regs provide that the deduction limitation rules generally apply to all food and beverages, whether characterized as meals, snacks, or other types of food or beverage items. Further, unless one of six exceptions applies, the deduction limitations apply regardless of whether the food or beverages are treated as de minimis fringe benefits under section 132(e). The final regs address the limitation on the deduction of food and beverage expenses under section 274(k) and (n), including the applicability of the exceptions under section 274(e)(2), (3), (4), (7), (8), and (9). Regarding the exceptions for expenses treated as compensation under section 274(e)(2) or (e)(9), the regs incorporate changes in response to comments that the “all-or-nothing” rule included in the proposed regs was unduly harsh. Treasury and the IRS believe the rules in the final regs avoid the unduly harsh result that could arise by prohibiting application of section 274(e)(2) or (e)(9) when a taxpayer includes some, but not all, of the value of a food or beverage expense in the recipient’s income. Regarding non-specified individuals, the regs provide rules for deducting food or beverage expenses under the exception in section 274(e)(2) or (e)(9). The regs also include a provision for specified individuals addressing the application of those exceptions. 

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IRS Publishes Final Regs on Business Expenses