Topic

Business Entertainment Expenses

March 12, 2021

TOPIC

Business Entertainment Expenses

March 12, 2021

Business entertainment expenses were an underlying casualty of the 2017 Tax Cuts and Jobs Act. The TCJA sharply limited the deduction for business entertainment expenses, except for certain employee events, like office parties, and for recreational, social, or similar activities.

What are the basic rules regarding the deductibility of business meal expenses paid or incurred in 2018 and later?

For expenses paid or incurred in 2018 and later, taxpayers generally may deduct 50% of the ordinary and necessary food and beverage expenses associated with operating their trade or business (for example, meals consumed by employees during work travel), if:

  • the food or beverage expense is not lavish or extravagant
  • the taxpayer (or an employee of the taxpayer) is present
  • the food or beverages are provided to a current or prospective business associate
  • the food or beverages provided during or at an entertainment activity are purchased separately, or stated separately on an invoice, receipt, or bill, such that the amount charged reflects the venue’s usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate their reasonable value

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What are the exceptions to the basic rules?

There are six exceptions to the limitations on deductions in IRC §274(k)(1) and to the 50% deduction limitation in IRC §274(n)(1):

  • expenses for food or beverages provided to an employee of the taxpayer are not subject to the 50% deduction limitation in IRC §274(n)(1) to the extent the taxpayer treats the expenses as compensation to an employee;
  • the limitations on deductions in IRC §274(k)(1) and IRC §274(n)(1) do not apply to expenses for food or beverages paid or incurred by one person in connection with the performance of services for another person (whether or not the other person is an employer) under a reimbursement or other expense allowance arrangement;
  • the limitations on deductions in IRC §274(k)(1) and IRC §274(n)(1) do not apply to expenses for food or beverages paid or incurred by a taxpayer for a recreational, social, or similar activity, primarily for the benefit of the taxpayer’s employees;
  • the limitations on deductions in IRC §274(k)(1) and IRC §274(n)(1) do not apply to food or beverage expenses of a taxpayer to the extent the food or beverages are made available to the general public;
  • the limitations on deductions in IRC §274(k)(1) and IRC §274(n)(1) do not apply to expenses for food or beverages that are sold to customers in a bona fide transaction for an adequate and full consideration in money or money’s worth;
  • the limitations on deductions in IRC §274(k)(1) and IRC §274(n)(1) do not apply to expenses for food or beverages provided to a person who is not an employee of the taxpayer to the extent the expenses are includible in the gross income of the recipient of the food or beverages as compensation for services rendered or as a prize or award under IRC §74.

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What forms of entertainment are no longer deductible?

  • Business entertainment expenditures at a social club, golf club, or similar venues, including dues and fees
  • Tickets to the theater, concerts, and other similar activities
  • Fees for outdoor activities, including fishing, hunting, and sailing outings
  • Sporting events tickets, including skybox expenses and transportation to the event
  • Contributions to educational organizations for the right to purchase tickets to athletic events, which are no longer considered charitable contributions and so are not deductible

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What determines whether an expense is ordinary and necessary?

An expense is “ordinary” if it is normal or common within the taxpayer’s business community, even if it is an unusual expense for the taxpayer. In addition, an expense is “necessary” if it is appropriate and helpful to the trade or business. The courts tend to accept the taxpayer’s own judgment of the business necessity of an expense, so long as the item is neither personal nor a capital cost. The “ordinary and necessary” requirement for business expenses has been interpreted to also include a general rule that an expense is deductible only to the extent that it is reasonable. For amounts paid or incurred before January 1, 2018, deductions for entertainment costs may be disallowed to the extent that they are lavish or extravagant. In the case of business meals, the Code expressly disallows the deduction of meal costs that are lavish or extravagant under the circumstances.

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Subscriber-Only Resource: 2021 Federal Tax Guide, Chapter 400: Trade or Business Expenses

In this section of Bloomberg Tax & Accounting’s annual tax guide, learn the specifics of deducting business expenses, including those related to travel and entertainment.

Key IRC Sections

Bloomberg Tax is pleased to offer the full text of the current Internal Revenue Code free of charge. This site is updated continuously and includes Editor’s Notes written by expert staff at Bloomberg Tax & Accounting indicating when a section has been repealed or when there is a delayed effective date, allowing you to see the current and future law. Links to related code sections make it easy to navigate within the IRC.


§162

Trade Or Business Expenses

§274

Disallowance Of Certain Entertainment, Etc., Expenses

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PORTFOLIO

Portfolio 520-2nd: Entertainment, Meals, Gifts and Lodging – Deduction and Recordkeeping Requirements

This Bloomberg Tax Portfolio explains the substantive rules for deducting the costs of business entertainment, gifts, and meals, and for excluding from an employee’s income the value of meals and lodging provided by the employer.

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PRACTICE TOOL

Tax Practice Series: Entertainment Expenses Overview

This section of Bloomberg Tax & Accounting’s Tax Practice Series covers rules pertaining to business entertainment costs before and after the 2017 Tax Cuts and Jobs Act.

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PRACTICE TOOL

Tax Practice Aid: Entertainment Expenses Client Letter

This Bloomberg Tax & Accounting Practice Aid offers a sample letter to help you address potential questions from clients related to the deductibility of entertainment expenses.

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