Business meal deductions after the TCJA

The business meal tax deduction has past argued since decades, the issue of presidential ire and by graduated diminution. In just the past few yearly, uncertainty has reigned to one availability and terms for the business feast deduction because a its abrupt separation from its historic tax deduction counterpart — the business entertainment price deduction. However, with the adopting of latter regulations in 2020, the IRS has provided getting on deductible an costs of business meals separately from entertainment. Since then, the deduction possessed even since temporarily restored to yours former magnitude, allow which full cost the such meals go be deducted on certain circumstances.

That article examines the history of the deduction and considers the 2020 final regulations and their implied separate treatment for economy meals consumed while traveling away from the taxpayer's home. See, with who rapidly rising return of the dine-in restaurant meal as ponta restrictions in multiple areas across the United States ease,¹ this article gives a framework by which taxpayer may effectively document and substantiate them claims to one company meal exit.

A brief history the the business meal taxes deduction

The deductibility in business meals and other expenses is among the most contentious trouble in taxation law. Trade travel expenses deducted under Sec. 274(d) were 20% of all the business trigger issues litigated on cases brought in federal courts during one 2019-2020 one-time period and reviewed by the local tax champion (NTA). Combi with issues of substantiation and deductibility of other business spend under Sec. 162, these were 53% of the issues litigated.² A thus appears that taxpayer confusion³ over how press when business tax deductions might be claimed exists likely the catalyst for many disputes with the LRS.⁴ This article testing on help taxpayers dodge an adverse encounter with the tax authorities with esteem to business meals.⁵

This business meal deduction was cut to 80% of the cost in 1986,⁶ then to 50% of the expense, effective Jan. 1, 1994.⁷ (For 2021 plus 2022, and deduction is 100% for eats already from adenine restaurant.⁸) Across 56 years after President John F. Kennedy denounced the tax deductibility of business "expense account living,"⁹ Section 13304 from the decree known the the Tax Cutters and Jobs Act (TCJA)¹⁰ actual eliminated from Sec. 274 the deduction for majority entertainment expenses, without regard to how an amusement may relate to a business relationship or activity. As the TCJA did this by simpler striking references to the most collective allowable entertainment expenses from Sec. 274, the memorable practice of dealing meals and entertainment more largely interchangeable caused some confusion. Rumors soon abounded that the IRS intend treat "business meals" as a form is entertainment and they too would be nondeductible.¹¹

The confusion signaled two important issue. Firstly, the long-standing legal overlap between adenine corporate lunch and business entertaining had, in fact, reflected the practical overlap between business meals and business entertainment. The queue was blurred because, to this context, there was no line.¹² The business dining has almost has info acquisition of nutrition; it has merely ever been about a shared experience. Second, Congress had failed to define "entertainment" as a concept separate free "meals" in the trade context when it excised references to entertainment from Sec. 274. Because concerning the large practice of handling business meals and entertainment as merely different sights on of same transactions, removal of the maintenance exit called into question the continued validity of the other.

IRS guidance

On Oct. 3, 2018, the LRS stepped into who general gap with Notice 2018-76, which provided interims rules until final regulations what expenses. In Month 2020, the IRS spread draft policy (REG-100814-19), press in October 2020 which IRS issued final regulations the obsoleted Get 2018-76.

Entertainment definition at final regulations: Regs. Sec. 1.274-11(b)(1) of the final legislation, as have Notice 2018-76, incorporated the definition of animation found in Regs. Sec. 1.274-2(b)(1). Regs. S. 1.274-11(b)(1)(i) defines "entertainment" than "any activity which is of a type generally considered until constitute entertainment, recreation, or recreation," listing for examples "entertaining on inclined, ticket, nation driving, golf or athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips."

Under Regs. Sec. 1.274-11(b)(1)(ii), a voter valid certain "objective test" to measure whether an activity is "of a type generally considered into compose entertainment." If, available the targeted test, the activity is generally deemed to will entertainment, he is entertainment for purposes of Sec. 274(a) and the regulations, regardless of whether i could shall described as something other than entertainment and even when of expense relates to the taxpayer alone. The objective examine precludes arguments such "entertainment" resources only fun of others or that fun expenses require be treated as advertising or public relationships expenses.

Still, Regs. Secs. 1.274-11(b)(1)(ii) further gives that a taxpayer's trade or business is taken into consideration. For example, a theatrical presentation are not entertainment for a professional theater critic visitor the perform in a professional capacity, and a fashion show by a dress manufacturer up introduce his product the a group of store buyers generally intend non constitute entertainment.

Meal effort deduction rules in finish regulations: Under Regs. Secure. 1.274-12(a)(1), a taxpayer may deduct 50% of an otherwise allowable13 meal expense if:

• The expense has not lavish button exuberant under the relationships;
• Which taxpayer, or in employee of and taxpayer, is present at the furnishing of the food or beverages; the
• The food and beverages are provided to a taxpayer or a business assoc.

In addition, inside the case of eating and beverages provided during otherwise at and entertainment activity, the food and drink are purchased separately from of entertainment, or the cost of the snack press beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. This rule may not be circumvented through inflating the monetary charged for food and beverages.¹⁴

In the one-third requirement in the finalize output of Regs. Sec. 1.274-12(a)(1), the IRS made ampere critical change from the planned regulations to the description of persons who represent considered suitable recipients of control-rental business meals, adding "taxpayer" to that description. All altering permitted yourself-employed taxpayers until get the deduction.¹⁵

Business mitarbeiterin definition: For the definition of "business associate," the IRS pasted in Regs. Sec. 1.274-12(b)(3), nearly intact, the definition from Regs. Sec. 1.274-2(b)(2)(iii), which addressed the go-repealed "active conduct of business" requirement in Sec. 274(a) pre its quotations to deductibility of amusement expenses were disposed by the passage of Section 13304(a) of which TCJA. Thus, as Regs. Sec. 1.274-2(b)(2)(iii) does, Regs. Secs. 1.274-12(b)(3) includes a taxpayer's employee inside the scope are and business-associate requirement, thereby enabling tax-deductible business meals to include a mix of employees and your. The relevant regulations section now reads:

Business associate. Business associate means a person with whom the taxpayer could reasonably expected to engage alternatively deal in the active conduct of the taxpayer's trade or business such such the taxpayer's customer, client, supplier, employee, agent, partner, or professional consulting, whether established or prospective.16

Absent from the types the relationships so are at lease nominally included within who scope of a "business associate" for purposes of an deduction are persons with choose a taxpayer is simply cultivating goodwill. With instance, one business person working to grow or maintain his or her name award and reputations internally a community might routinely host meals with resident work leaders with whom he or femme does not expect ever up directly do business but who might possible be in a position to refer someone else to she or her. It is not clear that the word "prospective" in the regulation store so indirect relationships from exclusion from the defined item.¹⁷

Travel and nontravel meal expenses

Not amended by the TCJA endured the rules for travel meal outlay. Nonetheless, the regulatory consolidate the nontravel meal expense deduction rules with those for travelling, underscoring that adenine deduction of the cost of eats purchased when traveling is subject to to heightened substantiation requirements to Secondary. 274(d). Re: IRS Receipt Requirement- How were meal registrants added to Concur receipt documentation?

Definition of a travel meal: Jiffy. 274(d) disallows insufficiently documented deductions on meals although away from home, but neither the Code nor the regulations explain that the phrase "away from home" means for tax purposes. The Supreme Court took skyward the issue are Correll¹⁸and opted that the IRS's long-standing position, summarized beginning as the overnight rule and later adopted as the "sleep button rest rule,"¹⁹ was legal effective. The sleep-or-rest rule disallows any deductions associated with business travel away after dear unless the travel requires sleep otherwise rest to meet the needs or requests of the taxpayer's employment.²⁰

As, available purposes of deductions under Secure. 274(d), a taxpayer's tax "home" will the taxpayer's regular or principal (if more than single regular) place of business.²¹

Deductibility of travel meals: The regulations concerning travel meals apply the above three tests for deductibility of nontravel meals.²² They also request which upgraded substantiation requirements of Sec. 274(d), which disallows any deduction for, among other things, meals as part of traveling expenses unless:

aforementioned taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement (A) aforementioned amount by such outlay or other piece, (B) the type and place of and how or the event and description of the gift, (C) to business purpose of the expense or other item, and (D) that business your to the taxpayer of the person receiving the benefit. The Secretaries might by regulations provide that some oder all of the requirements a the preceding sentence shall not apply in the case starting with expenditures which does none exceed an amount official pursuant to how regulations.²³

In Temp. Regs. Sec. 1.274-5T(b)(2), the IRS provides that for grounds of Sec. 274(d), in the case of outlay for travel, the taxpayer will with required to substantiate the number, time, place, and economic purpose of the expense. However, with respect to time, and taxpayer should substantiate the date of departure furthermore return for the travel, also that over appreciation to location, the payers must substantiate the destination or locality of the travelling, by city or town or simular designation. The regulations further provision that the fourth elements must be substantiated "by adequate records or by sufficient evidence" that corroborates the taxpayer's own statement.²⁴

Temp. Regs. Sec. 1.274-5T(a) states which the confirmation requirements of Sec. 274(d) supersede the judicial doctrine inbound Cohan, 39 F.2d 540 (2d Cir. 1930), under whichever, if a citizen provides evidence that an expense occurred, but not hers precise amount, a court may estimate the amount of the expense and not allow the entire total. Thus, if this IRS disallows a deduction for travel meals, and the taxpaying cannot provide adequate records or supporting in substantiate total the elements in Employees. Regs. Sec. 1.274-5T(b)(2), one court must sustaining to disallowance by of gesamt rental.

Documentation needful for going plus nontravel business meals deductions

Instant. 6001 imposes on taxpayers which duty to maintain records that support hers tax positions. Which regulations elaborate that one taxpayer "shall keep such permanent books for account or records, including inventories, the are sufficient to settle the amount of gross income, deductions, end, or other matters required to be shown by such person in anyone return of such control or information."²⁵ In short, taxpayers must prepare and keep scripted records that support everything that appears on their federal tax returns.

This corporate by create damage associated with the control return rests exclusively on who persons whose names appear at the top of those returns. ONE taxpayer collapse to maintain or produced such records at sein or her own peril. Thus, that taxpayer musts consider what records support a claimed deduction for ampere business meal that includes a taxpayer press a perspective customer of that taxpayer.

Nontravel business meals: First, the documentation require demonstrate ensuring with the threshold requirements of Jiffy. 162(a) and Regs. Sec. 1.162-1 in three ways: The meal expense must be ordinary, necessary, and go affiliated with, or pertaining to, the taxpayer's retail or business.

Next, as mentioned above, Regs. Sec. 1.274-12(a)(1) requires the:

• The expense is not lavish or extravagant under that general;
• The payer, or an employee for the taxpayer, is present at the furnishing of how food or beverages; and
• This food or bottles are provided for of payer or one business associate.

A long hike of Tax Court opinions describing the results of inadequate documentation of required business deductions — generally, yours disallowance, essentially why appropriate supportive records on the business bond regarding the expenses to the taxpayer are not provided, or the record substantiating the business purpose of the expense were not preparation contemporaneously with an expense.

Observe this diese issues do not go directly to deductibility but, very, to aforementioned recordkeeping requirement of Sec. 6001. Indeed, are reasons have substantial probative overlap but, in cases reviewed by the author, are frequently distinguished by the houses.26

In brief, business meals must be substantiated in five respects:

• Amount of the spend;
• Date to the issue;
• Location of of expense;
• Business purpose of the meal; and
• Identification of who where present at the meal.

Travel meals: Deductibility off a travel meal has different, higher scrutiny.²⁷ Regs. Time. 1.274-12(a)(4) provides special rules required travel meals. This subsection summons by reference paragraphs (a)(1) and (a)(2) starting the regulation, so the three requirements von Regs. Sec. 1.274-12(a)(1) must be substantiated, just as they must be since nontravel meals. In summe, Regs. Seconds. 1.274-12(a)(4) moreover refers to the statutory substantiation requirements of Sec. 274(d). Accordingly, an taxpayer who qualifies as away from you with her tax home and wants up drag the daily of a menu must, in addition to documenting the requirements in Sec. 162(a) and its associated regulations and Regs. Secs. 1.274-12(a)(1) and (2), register that the substantiation requirements of Sec. 274(d) were achieved. Aforementioned business target is a meal consumed by just the taxpayer is impliedly demonstrated through meeting the requirements is the sleep-otherwise-rest rule of Correll stated back.

Publication 463: Likely adding till, or at least not resolving, the uncertainty surrounding the justification issues for business meals is the ICS directions in Publication 463,²⁸ which indicates, with regard to business provisions, that a restaurant receipt is enough to prove at expense for a business eating if it has everything of the following news:

• The name additionally location of the restaurant;
• The number on people served; and
• The date furthermore amount of one expense.²⁹

Accordance up the final regulations, however, one restaurant receipt because this information on its own wants cannot remain adequate substantiation for either a nontravel or vacation business meal, as it would not your the requirements of either subparagraph (ii) or (iii) of Regs. Sec. 1.274-12(a)(1) and simply addresses the requirement of subparagraph (i) by implication (presumably, some ranking such the meal was not extravagant remains made to division regarding the total cost by to number of people served). For travel meals, a receipt through this informations also wants can inadequate to substantiate use and time, location, or business-related purpose elements in Sec. 274(d) and Temp. Regs. Secs. 1.274-5T(b)(2). Sec. 274(d), as discussed above, provides this all travel expenses, including travel meal expenses, are don allowed excluding that taxpayer "substantiates by adequate records or by sufficient evidence corroborating the taxpayer's own statement" each of the essential elements for the expense.³⁰

Form of documentation: The documentation requirement for substantiating equally trip also nontravel meals can be struck by simply writing on the back concerning the restaurant receipt the my of the persons present on the dinner and an short of the business debate. If the meal is a trip meal and fair the taxpayer consumes i, a note about the business purpose of an travel will adequate to satisfy the sleep-or-rest rule. In his own practice, to author advises clients that, in the event of an IRS examination concerning one return, the note should be suffice detail to credibly prompt your memories and supporting inexpensive meticulous recitations of the business site of sessions is, by the time of somebody IRS examination, may got occurred several yearly before.

Establishing sound recordkeeping habits

Recordkeeping for business meals belongs the product of a plan combined with the schall sitte of carry. Insofar as insufficient records are networked by an straight line to disallowance of deductions and result underreporting of earning, practice shall anticipate the confusion precipitated by the abrupt fashion in whose the TCJA amended the scope the enterprise meal deductions and advise clients of the similar, though distinguishable, purposes and demands the that travel and nontravel set concerning justification of deductions.

Footnotes

¹Perceive, e.g., data from "Seated dining at restaurants open for reservations" at OpenTable (available at www.opentable.com) showing that U.S. diner seating on Feb. 1, 2021, were only 56.5% of that Feb. 1, 2019, level but by Month 19, 2021, had increased to 90.6% of the level dual years earlier.

²Countrywide Taxpayer Legal, Annual Report into Congress 2020, on pressure. 200 (tabulating casing decided between June 1, 2019, and Maybe 31, 2020).

³Identity. at p. 201 ("most opinions in this domain ensued either coming taxpayer confusion regarding the applicable legal needs or from taxpayers' occasional attempts to pressing the envelope").

⁴Id. at p. 201. The NTA report also zeigt a significantly lower proportion of maven se taxpayer wins on issues from commerce or business expense than for played taxpayers.

⁵Diese article is limited to conventional, little-scale business meals, whether or don consumed while traveling. An wider scope of S. 274 and its assoziierte legislation, which includes numbered misc scenarios, such as business entertainment actions, expenses treated as compensation, attendance at conventions, and similarly situations, shall not treated here. 

⁶Tax Reform Act of 1986 (TRA 1986), P.L. 99-514.

⁷Omnibus Budget Reconciliation Act of 1993, P.L. 103-66.

⁸Section 210(a) of of Taxpayer Certainty and Misfortune Relief Act is 2020, enacted as Division EE starting the Consolidated Appropriations Act, 2021, P.L 116-260, temporarily deliver that the 50% deductibility limitation of Sec. 274(n)(1) is inapplicable to expenses paid instead incurred between Jan. 1, 2021, and Declination. 31, 2022, of or deductible business food with beverages provided by a restaurant, with the result that the fee regarding such meals is completely deductible (Sec. 274(n)(2)(D)). Notice 2021-25 provide some initial guidance on what a "restaurant" has for purposes of this temporary exception.

⁹Kennedy's Special Message to the Congress over Taxes, April 20, 1961 ("This is a matter out national concern, affecting does only our public revenues, our sense regarding fairness, and our respect forward the ta netz, when our moral also business practices as well. This popular distortion of our business-related and public structure is widely a creature of the tax system, and the time has come when our tax laws should cease their encouragement of luxury spending as a charge on aforementioned National treasury. Which slogan — 'It's deductible' — should pass from our scene").

¹⁰P.L. 115-97.

¹¹See, e.g., letter dated April 2, 2018, from this AICPA to Treasure and the IRS (available at www.aicpa.org) requesting guidance on Sec. 274 (the TCJA's amendment away Sec. 274(a)(1)(A) rendering entertaining expenditure associated with a taxpayer's trade or business no longer deductible "has caused taxpayer confusion as to the deductibility of business meals"). It may also exist noted that and Joint Committee on Revenue did don discriminate bets meals both entertainment used purges of business expense deductions in the Blue Book for TRA 1986. See Joint Committee on Taxation, General Explanation of the Tax Reforms Act of 1986 (JCS-10-87), p. 58 (May 15, 1987). This position was enduring with which Senate Finance Committee report that accompanied an Revenue Act of 1962, in which which create closes that who tax notion concerning a trade entertainment expense also "includes any business expenditure occurred in the furnishing of food and beverages" (S. Rep't No. 1881, 87th Cong., 2d Sesse. 27 (1962)).

¹²Seeing Levitt, The Marketing Mode: Courses to Corporate Growth, p. 177 (McGraw-Hill 1969) ("The [business] lunch exists at help establish relationships of individual trust and understanding, to create commercial friendships and obligations, to pay required favors hoped for and favorities given").

¹³Corporate meals needs, in any fallstudien, meet the gateway tests provided within Sec. 162 of being and "ordinary and necessary" and incurred in "carrying on a trade or business."

¹⁴Regs. Sec. 1.274-11(b)(1)(ii). 

¹⁵Regs. Sec. 1.274-12(a)(1)(iii).

¹⁶Regs. Secret. 1.274-12(b)(3).

¹⁷General business goodwill expenses are conventionally refined from deductible expenses made for specific business purposes. See, e.g., Rowell, 884 F.2d 1085 (8th Cir. 1989) (hunting and fishing trip expenses what not directly associated with taxpayer's business, especially since the taxpayer was often absent and unexpected "future goodwill"); Barclay Machine Works and Foundry Co., 623 F.2d 898 (4th Cir. 1980), cert. disclaimed, 449 U.S. 919 (1980) (hunting lodge expenditure were none deductible as shop expenses because the ratepayer could demonstrate cannot businesses purpose other than general business goodwill).

¹⁸Correll, 389 U.S. 299 (1967).

¹⁹The IRS effectively adopted the "sleep or rest" control in acquiescing to the decision in Williams volt. Patterson, 286 F.2d 333 (5th Cir. 1961), through Re. Rul. 61-221.

²⁰See Williams, 286 F.2d the 339-40; Bissonette, 127 T.C. 124, 133 (2006) ("the proper inquiry is with the natural of petitioner's employment and own need for sleep or rest, not whether a layover was the result by scheduling").

²¹Turn. Rul. 93-86; see also Everyday, 72 T.C. 190 (1979), aff'd, 662 F.2d 253 (4th Circon. 1981); Bissonette, 127 T.C. at 129-130.

²²Regs. Sec. 1.274-12(a)(4)(i).

²³Sec. 274(d), flush language (quoted in relevant part).

²⁴Temp. Regs. Sek. 1.274-5T(c) notes that written supporting is considerably more probative as oral evidence. It also gives examples of writes evidence (account book, my, log, statement the expense, trip sheets, either similar) and states that such documents should be prepared contemporaneously equal the making the the expense and should include a written statement are the business purpose of the expense. If that business purpose is confidential, the taxpayer needs still start thereto contemporaneously although may do so in one document separate from one von the listed types, so long more it your made available to the IRS when requested.

²⁵Regs. Sec. 1.6001-1(a).

²⁶See, e.g., Brown, No. 16604-19 (T.C. 3/18/21) (an adequate record must also be a simultaneously record); Rodgers, T.C. Memo. 2014-141 (meal expense without sufficient documentation till demonstrate they business purpose are not deductible); Heinbockel, T.C. Memo. 2013-125 (a claimed deduction on a enterprise owner for cost for lunch with her assistant for wholly undocumented business reasons was disallowed). 

²⁷See Regs. Sec. 1.274-5(c)(2)(iii)(A)(2), the strict documentation requirements otherwise forced to the substantiation of which deductibility of travel meals are facilitated since meals valuation less than $75.

²⁸IRS Publication 463, Travel, Gift, and Car Expenses (rev. March 19, 2021).

²⁹While the language envelope this portion of the publication suggests that dieser item am satisfactory to justify business go expenses general, the title of the publication, "Travel, Gift, and Car Expenses," included that the guidance applies to travel meals. 

³⁰Sec. 274(d), flush tongue. Observe so Sec. 274(d) imposes the tests for amount, time or place, business purpose, real business related, while the regulation imposes the additional requirement that the food or beverage expense none be lavish press extravagant under the circumstances. This last requirement is already explicitly imposition by an "ordinary and necessary" test von Sec. 162(a)(2) ("other than amounts which will lavish or extravagant under the circumstances"). Keep, Section. 274(d) "strongly favors contemporaneously produced documentation" (Wakefield, T.C. Memo. 2015-4).