Before the Tax Cuts and Jobs Act (TCJA), taxpayers could generally deduct 50% of business-related meal and entertainment expenses, and exceptions allowed bigger deductions in certain circumstances. The TCJA shifts the playing field for expenses paid or incurred after 12/31/17.
Unfavorable Change Disallows Deductions for Most Entertainment Expenses
Effective for amounts paid or incurred after 12/31/17, the TCJA disallows deductions for the most common business-related entertainment expenses, including the cost of facilities used for most business-related entertainment activities. Specifically, nondeductible treatment now applies to the cost of tickets to sporting events; license fees for stadium or arena seating rights; private boxes at sporting events; theater tickets; golf club dues; company golf outings for customers; hunting, fishing, and sailing outings; and so forth. Some business entertainment expenses are still deductible, but only in very limited circumstances.
Deductions Still Allowed for Eligible Food and Beverage Expenses
After the TCJA, expenses for recreational, social or similar activities primarily for the benefit of employees, other than highly compensated employees, continue to be 100% deductible. These expenses would include office holiday parties, picnics, summer outings, and company employee meetings with drinks and hors d’oeuvre served as long as the events are not primarily for the benefit of highly compensated employees. There is some question as to whether or not de minimize fringe benefit food and beverages are 100% deductible or subject to the 50% limitation. Other meals continue to 50% deductible as long as the meal meets the following conditions:
- The expense is ordinary and necessary in carrying on any trade or business
- The expense is not lavish
- An employee or the taxpayer is present
- A current or potential business customer, client, consultant or other contact is present
- The meal is billed separately if provided during an entertainment event.
These include employee travel meals, meals for employees, stockholder business meetings, meals for a business league where the meal is directly related and necessary for attendance at the meeting or convention, two employees having a working lunch and meals for the convenience of the employer.
An example of meals that are no longer deductible is the holiday party for customers. The portion that can be allocated to employees is 100% deductible.
Technical corrections may be required to allow the de minimum fringe benefit for food and beverages to be 100% deductible. IRS has announced it will provide additional guidance for business meals with clients.
These rules can get tricky, and future IRS guidance may change things, so contact us for details.
Consider assessing your current expense allowance policies to determine if the unfavorable TCJA provisions warrant changes—especially for entertainment expenses incurred for employees. Accounting system changes may be necessary to separately track employee entertainment expenses and business-related meal expenses, which are still 50% deductible.
Please contact us at 401-831-0200 if you have questions or want more information. The current tax rules for business-related meal and entertainment expenses are complicated, but we can help you plan ahead to get the best treatment for your business’s expenses.