This Client Memorandum continues Seward & Kissel’s coverage of changes to the U.S. federal income tax law connected to the passage of the Tax Cuts and Jobs Act in December 2017 (the “Act”).¹ Under prior law, 50% of certain meal expenses and certain entertainment expenses were deductible.² The Act changed the tax law to disallow all business entertainment expenses. This led to confusion as to whether meal and beverage expenses related to client entertainment continue to be deductible. This Memorandum describes IRS Notice 2018-76, which clarifies the status of the deductibility of such expenses.

The IRS intends to propose regulations clarifying that the general disallowance of deductions for business entertainment expenses does not apply to certain meals with customers or clients. Under the forthcoming regulations, 50% of the costs of business meals consumed during nondeductible entertainment will be deductible if:

1. The meal is an ordinary and necessary business expense;
2. The meal is not lavish or extravagant under the circumstances;
3. The taxpayer or the taxpayer’s employee is present at the meal;
4. The meal is provided to current or potential customers, clients or other similar business contacts; and
5. The food and beverages are purchased separately from the entertainment or the costs of the food and beverages are stated separately from the costs of the entertainment on one or more bills, invoices or receipts.³

For example, if a fund manager takes a prospective client to a baseball game and the manager buys hot dogs and Cracker Jacks, those costs would be 50% deductible but the costs of the tickets would not be deductible. However, no portion of the cost of a box suite at the game that includes in its price the value of any food and drinks would be deductible (unless the costs of the food and drinks were separately stated on the receipt, bill or invoice).

The rules contained in Notice 2018-76 and described in this Memorandum may be relied upon by taxpayers until the publication of the regulations.

Seward & Kissel will continue to actively monitor regulatory developments with respect to changes to the U.S. federal income tax law. For additional information on recent tax developments, please contact Jonathan P. Brose (212-574-1615), James C. Cofer (212-574-1688), Ronald P. Cima (212-574-1471), Peter E. Pront (212-574-1221), Daniel C. Murphy (212-574-1210) or Brett R. Cotler (212-574-1269).

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¹ See our memorandum on Final Tax Reform Legislation.
² Generally, under prior law, 50% of entertainment expenses were deductible if the expense was directly related to the active conduct of the taxpayer’s business or if the entertainment directly preceded or followed a substantial and bona fide business discussion.
³ As a general matter, we note that business meals with clients, whether or not such meals take place in connection with entertainment, in any case must satisfy the first four criteria to be deductible for U.S. federal income tax purposes.