February 1, 2018
The Tax Cuts and Jobs Act (TCJA) made substantial changes to the income tax rules for the deduction of entertainment expenses and meal expenses. These changes are effective for amounts incurred or paid after December 31, 2017, regardless of the taxpayer’s tax year. We encourage businesses to consider how their record keeping may need to be revised to address proper accounting for these changes, including possibly setting up separate accounts.
- Entertainment Expenses: No deduction is allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. In addition, no deduction would be allowed for benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business.
Historically, the restrictions on deducting entertainment did not to apply to certain types of expenses (Code Sec. 274(e)). One exception includes amounts treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee). Another exception from the 50% limitation includes expenses for recreational, social, or similar activities (including related facilities) primarily for the benefit of the taxpayer’s employees, other than highly-compensated employees. In other words, entertainment for a client would not be deductible but entertainment for the benefit of employees would be fully deductible. Currently the TCJA does not specifically address these exceptions and it appears they continue to apply. However further guidance and/or regulations may be provided to address this.
- Meal Expenses: There were no significant changes to the meal expense deduction. A deduction for any food or beverage expense is generally limited to 50% of the otherwise deductible amount. All qualifying business meals must be directly related and associated with a substantial and bona fide business discussion.
The one change provides that the 50% limit now applies to an employer’s expense of providing food and beverages to employees at an employer-operated eating facility that qualifies as a de minimis fringe benefit. These expenses were previously allowed at 100%.
- Transportation Services: Employers can no longer deduct any expense incurred for providing any transportation, or any payment or reimbursement, to an employee for travel between the employee’s residence and place of employment (e.g., parking and mass transit). The exclusion from income for such benefits received by an employee is retained.
Based on the new law, we recommend setting up separate general ledger accounts for client/customer entertainment (nondeductible), business meals (50 percent deductible), and recreational/social employee expenses (100 percent deductible).
Dowload pdf version: 2018.02.01 Tax Blog – Meals Entertainment