By Howard M. Wagner, Partner, National Tax Services at Crowe Horwath
Originally published at www.crowehorwath.com
The Tax Cuts and Jobs Act (TCJA) eliminates the deduction for business-related entertainment expense for amounts incurred or paid after Dec. 31, 2017. The TCJA also modifies the rules for deducting meals.
The TCJA eliminates the deduction for entertainment expenses, including activities such as taking a client or a prospect to sporting events, the theater, movies, concerts, and amusement parks. The act also eliminates deductions for expenses incurred for entertainment facilities (for example, a stadium suite or skybox) and for amounts paid for membership in any club organized for business, pleasure, recreation, or social purposes. The deduction for meals purchased during entertainment activities also is eliminated.
However, employers still can fully deduct entertainment expenses included in employee W-2 wages or paid under certain reimbursement arrangements. In addition, they still can fully deduct expenses, including meals, incurred for recreational, social, or similar activities primarily for the benefit of employees, such as expenses incurred for an annual holiday party or summer outing.
Businesses are allowed a 50 percent deduction for amounts paid for meals associated with the active conduct of the taxpayer’s trade or business. However, two changes made by the TCJA affect business meals.
First, a definition for “business meal” was removed, and meals provided to employees traveling still are 50 percent deductible. Second, beginning on Jan. 1, 2018, the cost of meals provided for the convenience of the employer, such as meals provided to employees who need to be available throughout the mealtime, are 50 percent deductible. Prior to tax reform, such meals were fully deductible. TCJA also expands the definition of meals for the convenience of the employer subject to the 50 percent limitation to include meals provided in the employer’s on-site dining facility. However, beginning on Jan. 1, 2026, no deduction will be allowed for meals for the convenience of the employer and for the cost, including meals, of operating an on-site dining facility.
Based on recent public comments from IRS officials, the following is a reasonable understanding of the deductibility allowance of business meals until additional guidance, if any, is promulgated:
|Meals with clients, customers, or prospects at an entertainment activity (for example, meals at a sporting event)||Nondeductible|
|Meals with clients, customers, or prospects with substantial business discussions||50% deductible|
|Meals with clients, customers, or prospects without substantial business discussions||Nondeductible|
|On-premise meals provided for the convenience of the employer (such as lunch or dinner provided to employees while working)||50% deductible (until Jan. 1, 2026)|
|Meal reimbursements for employees while traveling on business||50% deductible|
|Free meals to employees from an on-site dining facility||50% deductible (until Jan. 1, 2026)|
|Holiday party or similar social events for employees||100% deductible|
Items to Consider
Businesses should keep in mind a few things when reviewing their 2018 meals and entertainment policies. Because the effective date of the law change is based on expenses incurred after Dec. 31, 2017, the new rules apply now without regard to the company’s year-end. Fiscal year taxpayers therefore will need to adjust their policies. Businesses also should consider the impact of the new law on sponsorship arrangements, charitable events, and similar activities. Sponsorship arrangements often include suites or game tickets in addition to advertising benefits. Under the TCJA, the portion of a sponsorship agreement allocable to suites or game tickets will be nondeductible instead of 50 percent deductible. The remainder of the sponsorship agreement will continue to be deductible as an advertising expense.
Finally, the cost of charitable sporting events (such as a charity golf outing) typically involves two components: the cost of the golf and meals and the charitable contribution for amounts paid in excess of that amount. Before tax reform, the cost allocable to golf and meals was fully deductible. Beginning in 2018, the cost of meals and golf will not be deductible. The charitable contribution will continue to be deductible.