Meals and Entertainment Expenses After Tax Reform


The 2017 Tax Cuts and Jobs Act (TCJA) made several changes to the tax deductibility of meal and entertainment (M&E) expenses. In an effort to avoid any lost tax savings, businesses should properly classify their M&E expenses according to the percent deductible. The new deductible limitations apply to any amounts paid or incurred after December 31, 2017.

 

The chart below shows the three levels of deductible expenses (0%, 50%, and 100%) and a description of the items subject to each limitation.

 

Percent Deductible Description
0%
  • Entertainment expenses related to:
    • Any activity considered to be entertainment, amusement, or recreation, even if substantial business discussion occurs
    • Facility costs incurred in connection with entertainment or recreation activities
50%
  • Expenses for meals during employee travel
  • Meals provided for convenience of employer
  • De minimis meals provided to employees (may be infrequent and impractical to account for)
  • Expenses related to business meetings of employees, owners, or directors
  • Food and beverage costs related to business meetings (ex. business lunch meetings with clients)
  • Office snacks
100%
  • Expenses for goods, services, and facilities made available to the general public
  • Reimbursed food and beverage costs
  • Expenses for recreational, social, or similar activities primarily for the benefit of employees (i.e., company picnic, holiday parties, etc.)

 

As noted in the above chart, entertainment expenses are no longer deductible. It is expected that the IRS will issue additional guidance on how the new rules apply specifically to M&E expenses. Until that new guidance is provided, it is reasonable to rely on prior M&E guidance. In a previous revenue ruling, the IRS stated that meals or beverages are deductible “if the circumstances are of a type generally considered to be conducive to business discussion.…” Surroundings that are considered to be conducive to business discussion include restaurants and hotel dining rooms. Surroundings not considered to be conducive include entertainment at night clubs and sporting events.

 

TCJA also states that no deduction is allowed for membership dues pertaining to any club organized for “business, pleasure, recreation or other social purpose.” However, it is generally accepted that this may have been an inadvertent provision so businesses should await further guidance on the deductibility of these costs.

 

In summary, businesses should review their charts of accounts and make any necessary changes so that their M&E expenses are coded to the proper accounts that correspond to the deductibility of each expense. It is advised that businesses review their entire M&E systems and processes so that they can accurately analyze and record these expenses in accordance with the new tax rules.

 

If you are interested in learning more about this topic or others related to TCJA, our Tax Services Group professionals welcome the opportunity to talk to you and answer your questions.

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