Hungry and bored? Proposed regulations clarify meals and entertainment expenses

The IRS issued two new proposed regulations under the meals and entertainment (M&E) rules that serve to describe, clarify and expand on the changes made to the M&E rules in the Tax Cuts and Jobs Act of 2017 (TCJA) and related subsequent guidance. Specifically, one of the proposed regulations focuses on entertainment expenses, with the other centered on food and beverage expenses. Generally, under the TCJA, entertainment expenses are not deductible and meals are 50% deductible. The proposed regulations further define what entertainment is and when meals are deductible. 

Entertainment expenses

The proposed regulations focus on two key concepts pertaining to entertainment expenses. First, entertainment is defined as “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at bars, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips, including such activity relating solely to the taxpayer or the taxpayer's family.”

The IRS also provided that an objective test will be used to determine whether an activity is entertainment. Therefore, if an activity is generally considered to be entertainment, it will be treated as entertainment regardless of whether the expenditure can also be described as not being an entertainment expense. Amounts treated as entertainment expenses are nondeductible.

Second, the proposed regulations make it clear that food or beverage expenses must be plainly distinguished from entertainment expenses. Taxpayers can distinguish food or beverage expenses from entertainment expenses by either (1) purchasing the food or beverage separately or (2) ensuring the cost of the food or beverage is stated separately from the cost of the entertainment. Food or beverage expenses purchased or stated separately are 50% deductible. If food or beverage is not purchased or stated separately, then no allocation can be made, and the entire amount is a nondeductible entertainment expenditure.

Food or beverage expenses

The other proposed regulation addresses food and beverage expenses — specifically, (1) what expenses are included in the cost of food or beverage, (2) when are the expenses deductible, and (3) whether the expenses are subject to the general limitation of 50% or meet an exception to be fully deductible.

The M&E rules say no deduction is allowed for the expense of any food or beverages unless such expense is: