June 27, 2018
By Stephanie Cumings
Published in Tax Notes
Tax observers are torn on whether the IRS has the power to restore the deduction for client business meals that Congress seems to have unintentionally axed in the 2017 tax law.
While some practitioners contend that the IRS can salvage the deduction, one professor argues that Congress will have to amend the law if it really intended to keep client business meals deductible. The answer hinges on whether client business meals constitute “entertainment.” Under the prior law, entertainment expenses were 50 percent deductible if they met certain qualifications, but the Tax Cuts and Jobs Act (P.L. 115-97) eliminated the deduction altogether.
“Up until this change in the law, it didn’t really matter whether or not food and beverage was considered entertainment because it was 50 percent deductible either way,” Michael L. Hadley of Davis & Harman LLP told Tax Analysts.
The TCJA conference report stated that “taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).” Hadley said Congress may have believed it was leaving in place the deduction for food and beverages in all circumstances — including client business meals — but the example provided in the conference report doesn’t help settle the issue.
Gary McBride, a professor emeritus at California State University, East Bay, wrote in an article for Tax Notes that case law and the legislative history of section 274 suggest that client business meals are considered entertainment. But the regulations are less clear, he added.
Reg. section 1.274-2(b)(1) says that entertainment includes things like “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.” It goes on to say that entertainment “may” include providing food and beverages.
McBride acknowledged that the conference report’s language suggests that Congress unwittingly eliminated the deduction, but concluded that “absent a legislative change, the IRS cannot possibly draft regulations that preserve the pre-TCJA law” for client business meals.
Angela Spencer-James of EY pointed to more recent evidence during an EY webinar April 19. In Publication 463 — “Travel, Entertainment, Gift, and Car Expenses” — for the 2017 tax year it says that “entertainment includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself.”
The Mind of Congress
Hadley agreed there is evidence that client business meals historically have been considered entertainment, but he said that doesn’t necessarily resolve the debate.
“Any regulation is trying to interpret what’s in the mind of Congress,” Hadley said.
He contends that it’s within the IRS’s discretion to say that Congress intended meals with clients to be distinct from other forms of client entertainment, rendering such meals deductible.
The American Institute of CPAs also seems to believe the IRS has the power to save client business meals. The group urged Treasury and the IRS in an April letter to confirm that client business meals are still deductible as long as they:
- involve a company official and a current or prospective client;
- aren’t extravagant; and
- can reasonably expect to derive income or some other trade or business benefit from the meal.
The AICPA also urged the IRS to find that such meals are deductible even if they take place before, during, or after an entertainment event as long as they’re separately charged. The American Bar Association has also asked that guidance on the issue be included in the upcoming priority guidance plan.
Kathy Petronchak of Alliantgroup LP, who chaired the AICPA’s meals and entertainment task force, said the foggy relationship between meals and entertainment in the regulations partially prompted the letter. She added that it’s possible the IRS will draw the line at meals served in entertainment venues — like luxury boxes at sporting events — while client business meals that are separate from any form of entertainment will remain deductible. But either way,
Petronchak said the most important thing is that the rules be clear.
Veena K. Murthy of the Joint Committee on Taxation has said on multiple occasions that there was no intent to alter the deductibility of business meals, with the caveat that meals that are considered entertainment are no longer deductible. “As you know, there are regulations on what is entertainment, and they provide for an objective test,” Murthy said in May during an Employee Benefits session of the American Bar Association Section of Taxation meeting in Washington. “Whether or not guidance is needed in light of the changes in the law is a question for regulators and the administration.”
Petronchak said that additional clarity in the JCT’s impending blue book on Congress’s intent would make practitioners more comfortable advising clients. She and Hadley both said that practitioners seem to disagree on whether client business meals really are entertainment, which can lead to contradictory advice for the clients.
Hadley said even if the IRS does come out with guidance that preserves client business meals in whole or in part, it’s possible taxpayers aren’t sufficiently documenting their expenses to get the deduction. Petronchak said that whatever the IRS concludes, she hopes that substantiating the deduction won’t create too much of an administrative burden for both taxpayers and the IRS.
Kathy Petronchak is the Director of IRS Practices and Procedure at alliantgroup and is part of the alliantnational group in Washington, DC. In this role, she provides assistance on a wide range of procedural issues related to IRS procedures, such as pre-filing agreements; alternative dispute resolution; statute of limitations; account problems, and penalty issues. She also assists in representing clients before the IRS with an examination or appeal issue.
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