Enforcement of the Tax Cuts and Jobs Act brings change to business meal and entertainment definitions and deductions, impacting popular premium investments.
The 2017 Tax Cuts and Jobs Act (TCJA) introduced levels of uncertainty and unrest into many sports organizations. As the enacted tax reform is further implemented and enforced as law – with continued uncertainty at times – the ALSD remains on the beat.
Because the TCJA does not specifically address the deductibility of expenses for business meals, the Internal Revenue Service issued new guidance in October for meals and entertainment business expenses. And premium seating customers in sports venues will be affected.
Background and IRS Guidance
TCJA eliminated deductions for entertainment, amusement, or recreation expenses – even if that entertainment directly relates to trade or business discussion. However, 50% of the cost of business meals generally remains an eligible deduction if the meals are served to existing or prospective business contacts and if the meals are purchased separately from the entertainment or the cost is stated separately from the cost of the entertainment.
The IRS has yet to publish final regulations that clarify when business meal expenses are nondeductible entertainment expenses and when they are 50% deductible. Until the proposed regulations are effective, ALSD members can rely on guidance in Notice 2018-76.
Notice 2018-76 reads in part:
Under this notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
Impact for ALSD Member Venues
This food and beverage exception could have significant consequences for the sports and entertainment industry, specifically impacting all-inclusive premium seat environments.
When F&B Is 50% Deductible:
According to the most recent IRS guidance, Company A can invite Business Contact B to a sporting event. The cost of the tickets is nondeductible, as the sporting event is defined as entertainment in the TCJA. But if Company A buys Business Contact B a hot dog and a beer, those expenses are not defined as entertainment because they are purchased separately from the game tickets. In this case, Company A may deduct 50% of the F&B expenses.
When F&B Is NOT 50% Deductible:
Company A invites Business Contact B to attend a sporting event in a suite. The invoice states the cost of the event includes both the tickets and the food and beverages. The cost of the tickets is nondeductible, as the sporting event is defined as entertainment in the TCJA. And in this case, the food and beverages are also defined as an entertainment expense, and Company A may not deduct any expenses.
In order for Company A to be able to deduct 50% of expenses associated with F&B in a suite, the cost of that F&B must be stated separately on the invoice for the tickets.
In summary, if a suite holder pays one invoice inclusive of tickets and F&B, no deductions are permitted. If a suite holder pays for F&B separate from the cost of the suite tickets, a 50% deduction for the F&B expense is allowed.
For further clarifications and IRS guidance, please read Notice 2018-76 in its entirety.