Tax Cuts and Jobs Act Effect on Meals and Entertainment

James F. Sikora, II (Dec, 2018)

The Tax Cuts and Jobs Act (TCJA) passed into law on December 22, 2017 affected Section 274 of the Internal Revenue Code (IRC) for meals and entertainment expenses. Under pre-TCJA law expenses for recreation, entertainment, amusement, or for a facility where these types of activities took place were deductible if a taxpayer could establish that the expenses were either directly related to, or directly following, a bona fide business discussion associated with the taxpayer's trade or business. Under pre-TCJA law these deductions were limited to 50% deductible on the tax return, and the other 50% a permanent non-deductible item.

After January 1, 2018 with the passage of the TCJA any amounts paid for recreation, entertainment, amusement, or for a facility were these types of actives take place are no longer a deduction for tax purposes.  Non-deductible expenses now include the cost of sporting event tickets, theater tickets, golf club dues, private boxes, sporting events, etc. Under pre-TCJA law a "business meal" where there was a bona fide discussion related to the taxpayers business between the taxpayer and employee, or between a client or potential client, was 50% deductible. Under the new TCJA, IRC 274(k) states that no deduction is allowed for a business meal unless the following occurs:

  1. The expense is not lavish or extravagant under the circumstances, and
  2. The taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished.

If these two criteria are met then the cost of the meal is 50% tax deductible.

Another major item that many taxpayers will face are employee meals on company premises. Under pre-TCJA regulations expenses for beverages and food that were provided to a taxpayer's employees on business premises for the convenience of the employer were 100% deductible if the cost of the meals were a de Minimis fringe benefit under IRC 119(a)(1) (not included in the employee's income who received the meals).  Also, under this code section, if the meals were extended to the employee's spouse and children the value of the meals provided to them would also be excluded from the employee's gross income.  

Under the new TCJA rules meals that are provided to an employee of the employer for the convenience of the employer are not subject to IRC 274(a). Since the meals would not be subject to this subsection of the code the meals are 50% deductible to taxpayer for tax purposes, as long as the cost of these meals are not included in the employee's income as a de Minimis fringe benefit. There was also a sunset provision put in place under IRC 274. After December 31, 2025 there will be no deduction allowed for the following:

  1. Any expense for the operation of a eating facility on an employer's premise, as well as any expense for food and beverage associated with that facility, or
  2. Any expense for meals described in Section 119(a) (meals or lodging that are furnished by the employer for the employee for the convenience of the employer).

Some common expenses many employers encounter are office holiday parties and picnics for employees. The rules for these have not changed under the new TCJA.  These expenses are both still 100% deductible for employers.

Many taxpayers play in charitable golf events, or attend other charitable events during the year. Often these events include a meal, as well as an entertainment portion. These events will need to be broken out into three categories: meals, entertainment, and the charitable portion. You are still able to take 100% of the charitable amount as a charitable donation. The meal portion will be 50% deductible for businesses. The entertainment portion is non-deductible. Some non-for-profit organizations that put on these events have done a good job stating how much of the cost of the event is attributable to goods or services and the portion that represents a charitable contribution on their acknowledgement letter, leaving the remaining amount to be deemed as entertainment. For example, let's say you paid $250 to play in a golf tournament for a charitable organization. On the ticket itself and/or the acknowledgement letter, it states the value of the meal included was $50 and the value of the charitable donation was $150. Therefore, the remaining $50 would be considered entertainment. Under this scenario $150 is a charitable donation, $25 is deductible for tax purposes as a meal expense ($50 value of the meal times the 50% deductible limitation), and the $50 of entertainment is a non-deductible expense.

Meals and entertainment related expenses are very common for most businesses.  Understanding the new rules will allow businesses to maximize their deductions.  If you have any questions or concerns regarding the deductibility of these expenses, please do not hesitate to contact your Dermody, Burke & Brown advisor.

 

The information reflected in this article was current at the time of publication.  This information will not be modified or updated for any subsequent tax law changes, if any.

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