The Internal Revenue Service (IRS) has released a Notice regarding the tax treatment of meals, and the National Business Aviation Association (NBAA) has submitted comments to the IRS regarding the proposed regulations on bonus depreciation.
IRS Notice Regarding Business Meal Expenses
In IRS Notice 2018-76, the IRS takes the position that meals with business associates are not automatically entertainment activities, and apparently do not need to be evaluated to determine whether they constitute entertainment activities. Under the Notice, the essential requirements for a meal to not be an entertainment activity are that the meal must be with a business associate and must otherwise qualify as an ordinary and necessary business expense.
The Notice is welcome news to the extent that it supports the deductibility of the cost of the meal itself. However, the importance for the business aviation sector is the effect on the deductibility of the cost of travel to the meal. It is not uncommon for an executive to fly in the corporate jet to meet with a business associate over a meal and then fly to another location afterward. If the meal were categorically entertainment, then there was concern that the flight to and from the meal would also be classified as entertainment. The IRS Notice does not categorically classify such meals as entertainment. The IRS' position places a meeting with a business associate over a meal in a restaurant on a similar footing as a meeting in an office, which is appropriate.
Nevertheless, the documentation of the business purposes of the flight should include the business matters discussed during the meal and note why the business associate is considered a business associate.
NBAA Comments on Proposed Bonus Depreciation Regulations
The NBAA recently submitted comments to the IRS with respect to the IRS' proposed regulations on bonus depreciation under Internal Revenue Code (IRC) § 168(k). These comments were prepared primarily by NBAA Tax Committee members Alan Burnett and Glenn Hediger.
The NBAA's comments focus on the issue of what constitutes a written binding contract for bonus depreciation purposes. The NBAA argues that a contract can be a written binding contract even if the seller of the aircraft is only liable for minimal liquidated damages upon its breach of the contract. When bonus depreciation begins to phasedown beginning in 2023, it may be important for some taxpayers to extend the phasedown rates for one year by having a written binding contract in place to purchase an aircraft.
Conversely, taxpayers purchasing an aircraft pursuant to a contract entered into prior to the Sept. 27, 2017, effective date of the increase in the bonus depreciation rate to 100 percent (under the Tax Cuts and Jobs Act) may prefer not to have a written binding contract, so that they can claim 100 percent bonus depreciation. Since the proposed regulations would have a prospective effective date, it is anticipated that the proposed regulations would not apply to many taxpayers purchasing aircraft pursuant to contracts in place prior to Sept. 27, 2017.
For further information or guidance on how these items may impact your business specifically, contact Holland & Knight Partner John Hoover. He will speaking at the NBAA Tax, Regulatory and Risk Management Conference on Oct. 14, 2018.