Post Reform: How to Take a Tax Deduction for Meals and Entertainment
March 20, 2018 — As part of the sweeping tax reform passed in December of 2017, there were substantial changes to the deductibility of both business meals and entertainment expenses. The changes for both of these provisions are effective for expenses paid or incurred after December 31, 2017.
Prior to the new law, entertainment expenses directly related to a taxpayer’s trade or business were 50% deductible. Under the new law, anything considered to constitute entertainment, amusement, or recreation is now completely nondeductible, including the cost of facilities used in connection with these activities.
There were a number of changes to the types of meals that are subject to the 50% limitation. Under prior law, meals for the convenience of the employer (de minimis fringe benefits) or meals at on-premises dining facilities were generally fully deductible. These categories of meals will now be 50% deductible.
Business meals still continue to generally be 50% deductible. However, there is some uncertainty as to what will constitute a “business meal” under the new tax law. The only example provided in the Committee Report as a qualified business meal is for meals consumed by employees on work travel. Will meals provided at an entertainment function for prospects or clients (assuming the function also has a bona fide business purpose) continue to be 50% deductible? The tax commentary is divided on this issue, so we are hopeful that IRS guidance will provide further clarity in the future. Generally, business meals with clients where business is conducted, and that are not lavish or extravagant will remain 50% deductible. If minimal or no business is conducted and the meal is related to other entertainment we believe that the meal will be nondeductible as entertainment.
Certain meals and entertainment expenses continue to be 100% deductible, including the following:
- Recreational or social activities primarily for the benefit of employees (other than highly compensated employees). Examples include holiday parties and summer picnics.
- Expenses for goods, services, and facilities and made available to the general public. Examples include grand openings and similar functions.
- Meals and entertainment expenses sold to a client or customer (or reimbursed)
- Meals included as taxable compensation to an employee
Here are changes to deductibility of meals and entertainment expenses following the Tax Cuts and Jobs Act:
In light of these changes, it is important to review how your meals and entertainment expenses are categorized. Under prior law, the characterization between meal and entertainment expenses were irrelevant because the treatment was the same. In light of the new law, it will be important to segregate the entertainment expenses from the meal expenses. Furthermore, de minimis fringe benefits (such as coffee, snacks, and water at the office) were often coded to employee welfare or office supplies but now will need to be treated as 50% non-deductible meals.
Alex Helkamp, CPA, CCIFP
Alex Helkamp is a partner in the business tax service area at Redpath and Company. As tax leader on the construction, real estate, and engineering industry team, he assists clients with business tax planning, implementation of accounting standards, mergers and acquisitions transactions, and other accounting services. Having earned his CCIFP certification in 2017, Alex maintains a vast knowledge of construction industry issues and tax challenges faced by companies in the industry. Clients appreciate his insights to help them defer taxes, minimize tax liabilities, recognize tax credit opportunities, and free up cash flows. Alex enjoys meeting with his clients as much as possible throughout the year to discuss their goals and objectives, understand their unique needs, and help them find solutions that maintain their business and financial health. He is a frequent speaker on topics related to the construction industry and he has provided public accounting services at Redpath and Company since 2011.
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