Once upon a time, taxpayers could generally deduct 50% of business-related meal and entertainment expenses. However, several exceptions allowed larger deductions in certain circumstances.
Then came the Tax Cuts and Jobs Act (TCJA), which dramatically shifts the playing field for expenses paid or incurred after December 31, 2017. The new law also creates some uncertainties, as this article will explain.
The Before and After of Exceptions
Under prior law, the following exceptions to the general 50% deductibility rule were available. (In some cases, as you’ll see below, the exceptions have been retained under the TCJA).
An employer could deduct 100% of:
Employers also could deduct 80% of the cost of meals provided to employees whose work is subject to U.S. Department of Transportation (DOT) hours-of-service limitations. Two examples of employees who may be covered by this exception are interstate truck drivers and airline pilots. This exception is still available.
In addition to the above tax write-offs, business taxpayers could, under previous law, deduct 100% of the cost of:
Business taxpayers also could deduct 100% of tickets to fund-raising charitable sporting events if:
Deductions Now Disallowed
Effective for amounts paid or incurred after December 31, 2017, the TCJA disallows deductions for most business-related entertainment expenses, including the cost of facilities used for most of these activities.
Specifically, nondeductible expenses now include:
Key Points: Some business-related entertainment expenses are still deductible, but only in very limited circumstances such as the ones explained earlier. Taxpayers can apparently still deduct 50% of food and beverage expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after. However, this conclusion is not completely clear at this time. We are awaiting IRS guidance on this issue.
Deductions Still Allowed
Apparently, you can still deduct 50% of the cost of business-related meals with business associates. If so, the time-honored rules for proving that meals are business-related still apply. Once again, this conclusion isn’t completely clear at this time. We are awaiting IRS guidance.
It’s clear that you can still deduct 50% of the cost of meals for you or an employee while away from home on business-related travel.
In addition, a business’s costs for meals and food and beverages that fall under some of the exceptions listed above are still 100% deductible (for example, when the cost is reported as taxable compensation to recipients who are employees and non-employees). Meals provided to employees subject to the DOT hours-of-service limitations are still 80% deductible.
Key Point: If a hotel or other lodging establishment includes meals in its room charges or you give employees per-diem allowances that are intended to cover meals, you can use a reasonable method to determine the portion of expenditures allocable to meals and subject to the 50% deductibility rule. Ask your tax advisor about this.
Tax Planning Considerations
Taxpayers should assess their current expense allowance policies to determine if the unfavorable TCJA provisions warrant changes in policy — especially for entertainment expenses incurred by employees. Accounting system changes may be necessary to separately track employee entertainment expenses and employee business-related meal expenses, which may still be 50% deductible.
As you can see, the treatment of meal and entertainment expenses is complicated after the TCJA. Maybe more complicated than you thought! Also, understand that what you read here is based purely on our analysis of the applicable provisions in the Internal Revenue Code. Subsequent IRS guidance could differ.
Your tax advisor can keep you up to speed on the issues and suggest strategies to get the biggest tax-saving bang for your business meal and entertainment bucks.
Feeding Employees: Then and Now
De minimis meals. Under prior law, employers could deduct 100% of the cost of food and beverages supplied to employees, if the food and beverages were tax-free to employees because they qualified as a de minimis fringe benefit. Those benefits are defined as having a value and frequency of occurrence so small as to make accounting for them unreasonable or administratively impractical. Examples include:
– Meals or meal money provided to employees on an occasional basis, and
– Meals or meal money provided to employees that enable them to work overtime when necessary.
TCJA Change: For amounts paid or incurred in 2018 and beyond, the new law apparently still allows a 50% deduction for de minimis meals or meal money. Once again, we await IRS guidance on this issue.
Employer-Operated Eating Facilities. Under prior law, employers could deduct 100% of the cost of operating a qualified eating facility for employees, such as a company cafeteria. The facility had to meet certain requirements. First, it had to be:
– Owned or leased by the employer,
– Operated by the employer (directly or through a contract with a vendor), and
– On or near the employer’s business premises.
In addition, revenue from the facility had to equal or exceed the cost of operating the facility. Meals also had to be served during or immediately before or after the employees’ workday and the facility generally had to be available to all employees.
TCJA Change: For amounts paid or incurred from January 1, 2018 through December 31, 2025, the new law allows employers to deduct only 50% of the cost of operating a qualified eating facility for employees. After 2025, no deductions will be allowed.
Employers that operate eating facilities for employees should review the costs of running their facilities and determine if the temporary 50% deduction rule and the eventual complete disallowance rule dictate a change in policy.
Meals Provided for the Convenience of the Employer. Under prior law, the cost of meals furnished to an employee for the convenience of the employer could be fully deducted by the employer and treated as tax-free to the recipient. However, 100% deductibility for the employer only applied if a bevy of requirements were met. Otherwise the general 50% deductibility rule for meals applied.
TCJA Change: For 2018-2025, the TCJA allows employers to deduct only 50% of the cost of meals that are provided for their convenience. After 2025, no deductions will be allowed.