One provision of the Tax Cuts and Jobs Act (“TCJA”) that affects most businesses, regardless of form, is the additional limitations placed on meals and entertainment expense deductions. Many businesses incur meals and entertainment expenses to strengthen business relationships, anticipating that it will help grow the business. However, the IRS has always felt there is a potential for abuse of these deductions, making them a source of contention between taxpayers and the IRS.
Under prior law, a business was generally allowed to deduct expenses related to meals, entertainment, amusement or recreational activities, or facilities if such expenses were ordinary, necessary and directly related to the business. If a business met these requirements, it was able to deduct up to 50% of such expenses.
Prior law also allowed a business to deduct 100% of employer-provided de minimis meals and entertainment, such as meals provided on or near the business premises (e.g. meals provided to employees working in the office for meetings, over-time meals, etc.). In addition, the business was able to take a full deduction for the expenses if the amounts were reported as compensation to an employee (e.g. W-2), or includable in the gross income of a recipient who is not an employee (e.g. 1099-MISC).
Under the TCJA, no entertainment expense deductions are allowed with respect to:
- Any activity generally considered to be entertainment, amusement or recreation. Examples include, but are not limited to, sporting event tickets, sky-boxes or luxury suites, license fees paid to sporting arenas, theatre tickets, concerts, golf green fees, and fishing trips.
- Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes.
- A facility, or portion thereof, used in connection with any of the above items.
This provision eliminates the deduction for entertainment, amusement, or recreation even if it is directly related to the taxpayer’s business.
The TCJA also treats de minimis food and beverages provided by an employer to its employees as expenses subject to the 50% limitation. Traditionally, these expenses were fully deductible. The expanded 50% limitation applies to expenses incurred in 2018 through 2025. Amounts incurred after 2025 would not be tax deductible.
In addition, the TCJA disallows deductions associated with:
- Providing any qualified transportation fringe benefits to employees of the taxpayer.
- Any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment (except as necessary for ensuring the safety of an employee).
Mazars Insight: Businesses will still apply the pre-TCJA rules for expenses incurred through December 31, 2017, meaning they can still deduct 50% of their entertainment expenses and 100% of de minimis employer provided meals. For expenses incurred after December 31, 2017, de minimis employer provided meals will be 50% tax deductible and 100% non-deductible for expenses incurred after December 31, 2025.
Entertainment expenses that remain fully deductible under the new law include:
- Expenses included in income of employees and non-employees.
- Reimbursed meals and entertainment expenses invoiced to a company.
- Expenses for recreational, social, or similar activities primarily for the benefit of employees (holiday parties, picnics, etc.).
- Expenses for goods, services, and facilities made available by the taxpayer to the general public.
The above law changes are aimed at reducing taxpayer abuse and better clarifying what is and is not deductible.
|2017 Expenses (Old Rules)||2018 Expenses (New Rules)|
|Holiday Parties/Picnics||100% deductible||100% deductible|
|Meals and Entertainment Expenses||Meals – 50% deductible
Event tickets, 50% deductible for face value of ticket; anything above face value is non-deductible
Tickets to qualified charitable events are 100% tax deductible
|Meals – 50% deductible
No deduction for entertainment expenses
No deduction for entertainment related portion of the expenses
|Meals During Business Travel||100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise, 50% deductible||50% deductible|
|Meals Provided for Convenience
|100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise, 50% deductible||50% deductible
(nondeductible after 2025)
|Meals at a Seminar or Conference||50% deductible||50% deductible|
Mazars Insight: Businesses have tended to comingle meals and entertainment expenses in their books and records, since the tax treatment was generally the same. However, they should consider revising their bookkeeping practices to better identify the new tax deductible amounts.
Please contact your Mazars USA LLP professional for additional information.