Don't Mess With Taxes

Another lingering tax deduction concern created by the Tax Cuts and Jobs Act (TCJA) is finally clearer. The Internal Revenue Service says that half the cost of business meals is still tax deductible as an allowable work-related expense.

That's what the pre-TCJA tax law said. But because the Republican tax reform bill was cobbled together so hurriedly at the end of 2017, its legislative language left many confused.

And the new law's interpretation created a division among tax professionals (and semantics geeks) as to what exactly is entertainment.

Meals or entertainment vs. meals and entertainment: A great number of tax pros viewed the Internal Revenue Code phase "meals and entertainment" as a single entity, often referred to as M&E.

Before the law change, business could deduct up to 50 percent of entertainment expenses directly related to, in tax speak, "the active conduct of a trade or business or, if incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business."

So when the TCJA deemed that as of Jan. 1, 2018, entertainment expenses were no longer, starting in 2018, deductible, those tax folks saw that as eliminating the meals component, too.

Others in the tax world, me included, viewed entertainment as separate from meals. Taking a business associate to lunch, for example, to discuss your new contract is one thing. It's a meal.

Taking that person to the Houston Astros-Cleveland Indians' match-ups (three only, I hope!) that will help determine the 2018 American League Champion (go 'Stros!) is another, even if y'all consume massive amounts of nachos, hot dog and Torchy's Tacos. That's entertainment. 

And that means that the new tax law is a major business expense deduction threat to things like sports' box seats and golf club memberships.

Many, but not all, meals are safe: I'm pleased — and, I must admit, a bit dismayed — that the IRS and I think alike, at least in this case.

The IRS has deemed that the 50 percent write-off for wining and dining clients remains under the new tax law. Acceptable tax-deductible dining is allowed when it's with a current or potential business customer, client, consultant or similar business contact.

Entertaining clients, though, is a different matter. In Notice 2018-76, issued on Oct. 3, the agency says:

Section 1.274-2(b)(1)(i) of the Income Tax Regulations provides that the term "entertainment" means any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, 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 cost of taking a current or prospective client to one of these places is no longer tax deductible.

But, and there tends to be a but with most tax proclamations and laws, you need to pay attention to details. That's true with business M&E under the TCJA.

That's why you need to pay attention the dining circumstances. "Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event," according to the IRS in its announcement of the notice.

That means a meal purchased after a round of golf may still be deducted. However, tickets to a sports arena box to view a game that includes food and drink would not be eligible for the tax break.

Also, you still must abide by the prior tax law rules when it comes to meals. 

If you're buying a business client dinner while you discuss your new or continuing work arrangements, don't go overboard. Meal expenses the IRS determines to be extravagant or lavish will continue to be disallowed.

And as in all tax cases, get, annotate and keep those business meal receipts! No or inadequate documentation could doom your deduction.

More rules on the way: Note, too, that this week's TCJA M&E deduction decision is temporary.

Don't panic. That just means that, as the examples in Notice 2018-76 indicate, there still are issues to be nailed down.

Specifically, the IRS says it wants input on "the possible need to clarify the treatment of entertainment and business meal expenses; whether the definition of entertainment in reg. section 1.274-2(b)(1)(i) should be retained or revised; whether the objective test in reg. section 1.2742(b)(1)(ii) should be retained and, if so, whether and how it should be revised; and whether and what additional examples should be addressed in guidance." 

Claim a seat at the M&E deduction table: If you want to add to the discussion on the areas cited by the IRS or others related to the meals and entertainment deduction under the new tax law, you have until Dec. 2 to do so.

The IRS offers you a variety of ways to let it know your thoughts.

You can snail mail your M&E thoughts to:

Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2018-76)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Folks in the greater national capital area can send comments via courier to:

Courier's Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2018-76)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Or you can email your comments to [email protected]. Include "Notice 2018-76" in the subject line. 

After getting the comments, the IRS says it will issue its final regulations "soon." 

You also might find these items of interest:

• The importance of good, and separate, business records
• New tax law changes to business expensing & depreciation
• What are ordinary and necessary business expenses? It depends