Posted by Evan Piccirillo, CPA
For years, many businesses have been keeping track of expenses for meals and entertainment in a single account with little need to communicate with their accountant; it was understood that 50 cents of each dollar would be a tax deduction. No more. Effective January 1, 2018, the Tax Cuts and Jobs Act (“TCJA”) makes notable changes to the tax treatment of certain disbursements relating to these categories of expense. As a result, the accounting for these expenses needs to be reconsidered. Let me break it down for you.
Prior to 2018, meals and entertainment expenses were limited to a 50% tax deduction, unless certain exceptions applied that would allow a 100% deduction. Under the TCJA, entertainment expenses are 0% tax deductible, with very few exceptions, while meal expenses are generally still 50% deductible, with some important changes to the exceptions. Understanding these exceptions is critical to ensuring your business receives the proper tax deduction.
Here is a list of fully (100%) deductible meal expenses:
- Expenses included in the wages of the employee or included in income of the non-employee recipient (i.e. in W-2 wages of the employee or on a 1099 to a non-employee)
- Expenses for an employee event (like a party)
- Expenses for the general public (either as advertising/promotion or goodwill)
Here are 50% deductible expenses:
- Meals with clients
- Employee travel meals
- Meals provided to employees for the convenience of the employer (but 0% after 2025)
And the 0% deductible expenses:
- Entertainment for employees or clients (including sports and events tickets, membership dues to clubs, etc.)
Aside from the 50% to 0% change to entertainment expenses, the next most notable change is that of 100% to 50% (and later to 0% after 2025) to meals provided to employees for the convenience of the employer. In the past, these were considered de minimis fringe benefits and received a dollar-for-dollar tax deduction, but under the new law these kinds of expenses must be included in an employee’s income to be 100% deductible or fall to the 50% category. Not good for hungry employees and their employers.
To accommodate these new tax rules, businesses have to disambiguate meals and entertainment into entertainment (which is nondeductible), meals that are 50% deductible, and meals that are 100% deductible on their books. In absence of these separate ledger accounts, tax preparers will have to inquire about the allocation and taxpayers will need to analyze the charges booked to such an account, which can add time and contribute to errors.
Additionally, employers may need to review their policies and procedures for providing meals and/or entertainment to their employees and clients. Certainly they will need to reconsider those sports facility box seats. Also, since parties for employees are 100% deductible, perhaps it’s time for businesses to start throwing more parties?
If you would like additional guidance on this topic, contact your trusted advisor to assist you in making decisions going forward and to establish sound procedures to properly account for meals and entertainment expenses on a prospective basis.