The “Tax Cuts and Jobs Act” (TCJA) of 2017 is the most sweeping tax reform in thirty years. The TCJA generally reduces tax rates for individuals and businesses, modifies and eliminates certain deductions, and overhauls the international tax system. This alert describes the significant changes to the rules for deductions of meals and entertainment expenses that went into effect on January 1, 2018.
Prior to the enactment of the TCJA, 50% of meals and entertainment expenses were generally deductible if the expenses incurred were directly related to or associated with business activities. Common types of business entertainment include hosting a client or customer at a show, sporting event, or recreational activity. Business meals subject to the 50% limitation included meals at business meetings with clients, customers, employees, stockholders, agents and or directors.
Under the old rules, certain types of meals and entertainment expenses were not subject to the 50% deduction limitations (i.e. these expenses were fully deductible), such as:
- Food and beverages for employees furnished on the business premises, either for the convenience of the employer or at an employer-furnished eating facility. Typical examples of meals provided for the convenience of the employer are meals brought in during employee meetings, and dining delivery for employees working extended hours.
- Nondiscriminatory recreation for employees, such as social gatherings of employees, holiday parties and summer outings that are not designed to only benefit highly compensated employees.
- Expenses treated as compensation.
- Reimbursed expenses, which are expenses that businesses pass-through to their clients or customers.
- Entertainment sold to customers.
In general, entertainment expenses are now disallowed in full even if the expenses are directly related to or associated with business. Therefore, the cost of entertaining clients and customers at shows, sporting events, etc. are no longer deductible.
In addition, the rule allowing full deductibility for food and beverages for employees furnished on the business premises either for the convenience of the employer or at an employer furnished eating facility (the first exception provided above), has been modified. These expenses incurred after December 31, 2017, are now subject to the 50% limitation, and after December 31, 2025, no deduction will be allowed for these expenses.
The TCJA did not change the rules allowing full deductibility for the other exceptions listed above. Employee recreation and social events, expenses treated as compensation, reimbursed expenses, and expenses for entertainment sold to customers are still fully deductible.
Under the TCJA, entertainment expenses previously subject to a 50% limitation are now non-deductible, and some formerly deductible meal expenses are now subject to a 50% limitation. These changes went into effect January 1, 2018. To get ahead of the record keeping and documentation that will be needed to file 2018 tax returns for your business, we recommend modifying employee expense reimbursement and accounting procedures to properly capture these new categories of deductible and non-deductible expenses.