The Tax Cuts and Jobs Act (TCJA) was signed into law on Dec. 22, 2017, and represents the most extensive tax reform legislation we’ve seen in 30 years. These sweeping tax law changes impact many taxpayers, including individuals, businesses, estates and trusts. The following article discusses changes pertaining to the meals and entertainment deduction for businesses. Tax professionals should consider sharing these important measures with their clients and prospects by way of newsletters, social media or face-to-face tax planning sessions.
Under prior law, an employer could deduct 100 percent of the cost of providing food and beverages to its employees through an eating facility that qualified as de minimis fringe benefits. Housing and meals provided to employees on the business premises for the convenience of the employer are excluded from income.
Under the TCJA, and for amounts incurred or paid after Dec. 31, 2017, the current 50 percent limit on deductibility of business meals is expanded to include expenses of the employer associated with providing food and beverages to employees through an eating facility. Such amounts incurred and paid after Dec. 31, 2025, will no longer deductible.
As under pre-TCJA law, businesses are allowed to deduct 50 percent of the food and beverage expenses associated with operating their trade or business, such as meals consumed by employees on work travel.
IRS guidance (IR-2018-195) issued on Oct. 3, 2018, adds that the meals may be provided to a current or potential business customer, client, consultant or similar business contact. In other words, business meals are deductible if the requirements are met and the expense is substantiated.
Under prior law, businesses could deduct up to 50 percent of expenses relating to meals and entertainment. In practical terms, meal expenses were treated as a subset of entertainment expenses and needed to be “directly related to” or “associated with” business requirements.
For amounts incurred or paid after Dec. 31, 2017, the TCJA disallows the 50 percent deduction for entertainment, amusement or recreation that are directly related to the business, except for the benefit of employees like office parties. Thus, the bar on deductions applies to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets and golf club dues, for example. It’s wise to separate these expenses on your profit and loss statements, so you can better analyze these categories going forward. One caveat to note: IRS guidance given on Oct. 3 states that food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
Download this guide to how meals and entertainment deductions have changed between tax years 2017 and 2018.
Editor’s note: This article was originally published by CPA Practice Advisor. This article was originally published on Aug. 14, 2018, and was republished on Oct. 4, 2018, with updates based on IRS guidance, and again on Nov. 19, 2018, with PDF content.