New Tax Law Puts Businesses on a Diet
Over the years, businesses have become accustomed to the benefits of deducting its business-related meals and entertainment expenses. However, the Tax Cuts and Jobs Act of 2017 has changed the deductibility of certain meals and entertainment expenses.
Prior to 2018, a taxpayer could deduct 50 percent of business meals and entertainment and 100 percent of meals provided through an on-premise cafeteria or meals provided for the convenience of the employer. Under the new law, effective January 1, 2018, entertainment expenses are no longer deductible but client business meals, meals provided through an on-premise cafeteria or meals provided for the convenience of the employer (such as meals provided to employees who need to be available throughout the mealtime) are subject to the 50 percent limitation. However, the 50 percent limitation is in place for a limited time only. For tax years beginning on or after 1/1/2026 these items will not be deductible at all.
No change was made to the rule allowing a 50 percent deduction for business meals and a 100 percent deduction for expenses incurred for recreational, social, or similar activities (including facilities, but not club dues) primarily for the benefit of employees (other than employees who are highly compensated employees). Thus, social events such as a company holiday party, a company picnic, or a company outing to a sporting event are still 100% deductible.
Businesses can maximize their tax deductions and save time on tax preparation by setting up separate general ledger accounts for business meals (50 percent deductible), entertainment (nondeductible), and recreational/social employee expenses (100 percent deductible). Because entertainment-related meals are now treated differently from client business meals, it may be necessary to establish new documentation procedures or information management systems in order to account for each separate category of meals. It will be extremely important for business to separately track and account for meals and entertainment so that these deductions are not inadvertently lost by lumping them then in with the nondeductible meal and entertainment costs.
Based on recent public comments from IRS officials, the following is an understanding of the deductibility allowance of business meals until additional guidance is available.
Deductibility Allowance of Business-related Meals
|Event||2017 Expenses (Old Rules)||2018 Expenses (New Rules)|
|Office Holiday Party or Summer Picnic||100% deductible||100% deductible|
|Client Business Meals||50% deductible if taxpayer is present, and not lavish or extravagant||50% deductible if business is conducted, taxpayer is present, and not lavish or extravagant|
|Entertainment-related Meals||50% deductible||No deduction (e.g., meals incurred when no business is conducted, potentially at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips)|
|Transportation to/from Restaurant for Client Business Meal||100% Deductible||100% Deductible|
|Sporting Event Tickets|
50% deductible for face value of ticket.50% deductible for skybox expenses to the extent of non-luxury seat ticket face value in such box.
100% deductible for charitable sporting events.
Contributions for the right to purchase tickets to an educational institution’s athletic events 80% deductible.
50% for transportation to/from and parking at sporting events.
No deductionNo deduction
|Club Memberships||No deduction for club dues; however, 50% deduction for expenses incurred at a club organized for business, pleasure, recreation, or other social purposes if related to an active trade or business||No deduction|
|Meals Provided for the Convenience of Employer||100% deductible provided they are excludable from employee’s gross income as de minimis fringe benefits; otherwise 50% deductible||50% deductible
(nondeductible after 2025)
|Meals Provided to Employees Occasionally and Overtime Employee Meals||100% deductible provided they are excludable from employees’ gross income as de minimis fringe benefits; otherwise 50% deductible||50% deductible|
|Water, Coffee, and Snacks at the Office||100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise 50% deductible||50% deductible
(nondeductible after 2025)
|Meals in Office During Meetings of Employees, Stockholders, Agents, or Directors||50% Deductible||50% Deductible|
|Meals during Business Travel||50% Deductible||50% Deductible|
|Meals at a Seminar or Conference, or at a Business League Event||50% Deductible||50% Deductible|
|Meals included in Charitable Sports Package||100% Deductible||50% Deductible|
|Meals Included as Taxable Compensation to Employee or Independent Contractor||100% Deductible||100% Deductible|
|Meals Expenses Sold to a Client or Customer (or Reimbursed)||100% Deductible||100% Deductible|
|Food Offered to the Public for Free||100% Deductible||100% Deductible|
Bottom line…the cost of doing business just went up and the deduction for entertainment has disappeared. Stay tuned as we see how the IRS will implement the new law. Of course, a slew of audits and court cases will follow that will give further guidance regarding the new provisions. It’s not over yet… well, at least it’s in effect until 2025 and then a future Congress will have to take it up and deal with it.
Will there be many more questions that will arise? Yes. Will there be exceptions to the general rules? Absolutely. Will there be further developments? Of course. Contact your HW&Co. tax advisor to discuss your specific situation.