Meals and Entertainment Changes Under Tax Reform
Though the Tax Cuts and Jobs Act (TCJA) has been advertised as pro-business, there are several changes that will affect the deductibility of expenses. The TCJA issued firmer guidelines on expenses related to meals and entertainment. You’ll see these changes affecting client-related business meals, employer-provided business meals, employer-hosted activities, and entertainment.
Client-related business meals
Prior to the TCJA, under Internal Revenue Code (IRS) section 274(k), taxpayers were entitled to a 50 percent deduction for expenses incurred for business meals provided the meals were not lavish or extravagant under the circumstances and the taxpayer or an employee of the taxpayer was present for the meal. The TCJA has caused some debate; are business meals that meet the previous definition still deductible? The American Institute of CPAs (AICPA) stipulates that business meals that take place between a business owner or employee and a current or prospective client; are not lavish or extravagant under the circumstances; and where the taxpayer has a reasonable expectation of deriving income or other specific trade or business benefit from the encounter, are not disallowed under Sec. 274(k).
Employer-provided business meals
Employers commonly provide meals to their employees on business premises for the convenience of the employer. The TCJA limits the deduction for employer-provided meals to 50 percent for the amount paid from 2018 through 2025 and fully disallows this deduction after 2026. Employers will need to track these expenses to ensure that only 50 percent is deducted from 2018-2025 and no tax deduction is taken beginning in 2026.
Companies attempt to set themselves apart in the current competitive environment by hosting social activities for employees. Under prior law, an employer-provided social or recreational event was not limited and the employer was entitled to deduct 100 percent of the costs incurred to host a recreational, social, or similar event if the event was open to all employees. General consensus is that expenses for holiday parties and similar activities will continue to be fully deductible as a business expense.
Entertainment expenses prior to the TCJA were 50 percent deductible. The TCJA completely disallows a deduction for amounts paid or incurred after December 31, 2017 for entertainment or recreational expenses and entertainment facilities. The deductibility relative to meals that are incurred while attending an entertainment activity is unclear. Another significant change is that contributions made for university athletic seating were previously 80 percent deductible, however, these contributions will no longer qualify for a deduction after December 31, 2017. Taxpayers should be factoring disallowed deductions in their entertainment budgets.
There should be further guidance later this year that will provide more clarification of the topics discussed. In the meantime, it is pertinent to track these different categories of expenses separately for your tax preparer. Contact one of our tax professionals for further guidance on these topics.
Summary of Deductibility for Various Meal Expenses
Taking a client to dinner? 50%
Lunch on-site (internal & external)? 50%
Working dinner for employees? 50% (NONE after 2025)
Traveling employee? 50%
Office holiday party? 100%
Meal served in luxury booth at the stadium? NONE