The “Tax Cuts and Jobs Act” (the Act) made significant changes to the business provisions that affect a company’s ability to deduct meal and entertainment (M&E) expenses. The Act completely eliminated an employer’s ability to deduct entertainment expenses (even if those expenses were for business). The Act also significantly limited an employer’s ability to deduct expenses associated with de minimis meals, including meals provided at an employer-operated eating facility or meals provided for the convenience of the employer.
This post highlights what taxpayers must consider now to make sure they fully comply with the M&E provisions of the Act.
Entertainment, recreation, social and similar expenses
Under prior law, Section 274 prohibited deductions for expenses related to meals, entertainment, amusement or recreational activities, or facilities (including membership dues), unless such expenses were ordinary, necessary and directly related to the active conduct of the taxpayer’s trade or business. If a taxpayer was able to demonstrate that such expenses were ordinary, necessary and directly related to its trade or business, the taxpayer could deduct up to 50% of such M&E expenses.
Even though most M&E expenses were only 50% deductible, taxpayers could deduct 100% for certain qualified expenses, including:
- Qualified de minimis meals provided to employees
- Meals provided on or near the business premises of the employer in an employer-operated eating facility
- Meals provided for the convenience of the employer
In addition, the following expenses were, and remain, 100% deductible:
- Amounts reported as compensation to an employee
- Amounts includable in the gross income of a recipient who is not an employee
- Certain reimbursed expenses, including reimbursement arrangements in which an employer reimburses the expenses incurred by a subcontractor’s employees
- Items made available to the general public
- Expenses for goods or services (including the use of facilities) that are sold by a taxpayer to customers in a bona fide transaction for adequate and full consideration
- Qualified employee recreation, social or similar activities (including facilities) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of Section 414(q))
Additionally, these amounts were 50% deductible under prior law and remain 50% deductible under new law:
- Expenses for food and beverages provided primarily for the benefit of employees furnished on the taxpayer’s business premises
- Expenses incurred by a taxpayer directly related to business meetings of employees, shareholders and agents or directors
- Expenses directly related and necessary to attend business meetings or conventions for business leagues, chambers of commerce, real estate boards, boards of trade and any entity that is tax-exempt under Section 501(a)
The Act modifies Section 274 by making all entertainment expenses, including facilities used for such activities, nondeductible, even if these expenses directly relate to, or are associated with, the conduct of business. Business meals and beverages, however, remain 50% deductible.
Hence, all forms of business entertainment, including golf outings, fishing, sailing, sporting events, hunting, theater tickets, license fees paid to sporting arenas, golf club dues, etc. are entirely nondeductible, even if a substantial and bona fide business discussion is associated with the activity.
Taxpayers may still deduct 50% of food or beverages incurred at such events, but only if they can prove that business was conducted.
The only recreation expenses that might still be 100% deductible are expenses for recreational social, or similar activities (including facilities) primarily for the benefit of employees; this exception, however, is extremely limited.
These changes are effective for amounts paid or incurred on or after January 1, 2018.
Taxpayers should assess their current policies to determine if the changes under the Act will warrant a change in their business expense policy or if system changes are necessary. In many instances, taxpayers do not separately track food/beverage expenses and entertainment expenses. In addition, substantiation for such expenses does not always separately state how much of an expense relates to food/beverages and how much relates to entertainment.
Now that entertainment is nondeductible, taxpayers should also assess their current inventory of licensing agreements with entertainment venues, social clubs and other entertainment/recreation facilities.
For more information or to speak with a Caroprese tax professional directly, please contact us.