Confused About New Meals & Entertainment Expense Rules?
The 2017 Tax Cuts and Jobs Act (TCJA) made significant changes to business provisions that affect a company's ability to deduct meals and entertainment (M&E) expenses.
TCJA eliminated an employer's ability to deduct entertainment expenses. It also significantly limited an employer's ability to deduct expenses associated with de minimis meals, including meals provided at an employer-operated eating facility or meals provided for the convenience of the employer.
While TCJA changed a number of provisions compared with prior law, some rules remain the same. The following provides the specifics and highlights what taxpayers must consider to ensure full compliance with the M&E provisions of TCJA. Also, refer to our earlier blog on this topic for a basic summary of the changes in the rules.
What Meals & Entertainment Rules Changed?
Under prior law, Section 274 prohibited deductions for expenses related to meals, entertainment, amusement or recreational activities, or facilities unless such expenses were ordinary, necessary and directly related to the active conduct of the taxpayer's trade or business. If a taxpayer was able to demonstrate that such expenses were ordinary, necessary and directly related to its trade or business, the taxpayer could deduct up to 50% of such M&E expenses.
Even though most M&E expenses were only 50% deductible, taxpayers could deduct 100% for certain qualified expenses, including:
- Qualified de minimis meals provided to employees
- Meals provided on or near the business premises of the employer in an employer-operated eating facility
- Meals provided for the convenience of the employer
TCJA, effective for amounts paid or incurred on or after January 1, 2018, modified Section 274 by making all entertainment expenses, including facilities used for such activities, nondeductible, even if these expenses directly relate to, or are associated with, the conduct of business.
Hence, all forms of business entertainment, including:
- golf outings
- sporting events
- theater tickets
- license fees paid to sporting arenas
are entirely nondeductible – even if a substantial and bona fide business discussion is associated with the activity. Taxpayers may however deduct 50 percent of an otherwise allowable business meal expense if 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. See link below for further explanation and examples.
The only recreation expenses that might still be 100% deductible are expenses for recreational, social or similar activities (including facilities) primarily for the benefit of employees. This exception, however, is extremely limited.
What Meals & Entertainment Rules Remain the Same?
The following expenses were 100% deductible under the prior law and remain so under the new law:
- Amounts reported as compensation to an employee
- Amounts includable in the gross income of a recipient who is not an employee
- Certain reimbursed expenses, including reimbursement arrangements in which an employer reimburses the expenses incurred by a subcontractor's employees
- Items made available to the general public
- Expenses for goods or services (including the use of facilities) that are sold by a taxpayer to customers in a bona fide transaction for adequate and full consideration
- Qualified employee recreation, social or similar activities (including facilities) primarily for the benefit of employees (other than employees who are highly compensated (within the meaning of Section 414(q))
Also, the following expenses that were previously 100% deductible are now 50% deductible under the new law:
- Expenses for food and beverages provided primarily for the benefit of employees furnished on the taxpayer's business premises
- Expenses incurred by a taxpayer directly related to business meetings of employees, shareholders, and agents or directors
- Expenses directly related and necessary to attend business meetings or conventions for business leagues, chambers of commerce, real estate boards, boards of trade and any entity that is tax-exempt under Section 501(a)
What Do Taxpayers Need to Consider?
TCJA eliminates or significantly limits a taxpayer's deductions for meals and entertainment expenses, as well as certain fringe benefit expenses incurred in relation to the taxpayer's business activities after December 31, 2017.
As a result, taxpayers should consider the following:
- Assess their current policies to determine if the changes under TCJA will warrant a change in their business expense policy or if system changes are necessary. In many instances, taxpayers do not separately track food/beverages and entertainment expenses. In addition, substantiation for such expenses does not always separately state how much of an expense relates to food/beverages and how much relates to entertainment.
- Review their current licensing agreements with entertainment venues, social clubs and other entertainment/recreation facilities since entertainment is now nondeductible.
- Evaluate the impact of the tax reform changes on internal and external entertainment activities. They also should consider creating new general ledger accounts to properly account for such expenses.
Topics: Tax Topics