By: Andrew J. Dill | Staff Accountant
The Tax Cuts and Job Act (TCJA) has brought many changes into the tax world this year, some clear-cut (the schedule A tax deduction is limited to $10,000, for example) and some not as clear. Meals and entertainment is more of a grey area than one would expect. In the past, business meals and entertainment were deductible subject to a 50% limitation. After the TCJA was put into place the meals and entertainment deduction became a bit more complicated.
With regards to business meals, the regulations have not changed much from prior years where 50% of expenses are deductible if the expense meets certain criteria. The meals must be provided to current or potential business customers, clients, consultants or similar business contacts. It is also important to note that the taxpayer or an employee must be present for these expenses to be deductible. If the expense comes as a package deal (sporting event tickets) that includes both the ticket and food/beverages during the event, the food/beverage expense must be stated separately on the invoice to be deductible.
What has changed is the deductibility of meals provided to employees. Meals provided for the convenience of the employer, meals provided on or near the business premises of the employer in an employer-operated eating facility, and qualified de minimis meals provided to employees were all 100% deductible. Between January 1, 2018 and December 31, 2025, these meals are only 50% deductible. After that, they will not be deductible at all.
Beginning in 2018, business entertainment has become non-deductible in nearly all cases, but there are some exceptions that can be taken advantage of if they meet the requirements. There are certain exceptions that are subject to a 50% limitation and exceptions that are fully deductible. The expenses that are 50% deductible consist of costs for food and beverage for employees on the business premises (such as snacks and working/overtime meals) and costs directly related to business meetings, including costs directly related and necessary to attend the meeting.
The following scenarios are deductible entertainment expenses after 2017:
- Expenses treated as employee(s) compensation are fully deductible given the taxpayer treats the expenditure as compensation paid to the employee and wages subject to withholding.
- Certain reimbursed expenses which occur when two separate taxpayers pay the same expense: the person initially incurring the expense and paying the provider of the entertainment and the person reimbursing the first person for that expense. The expense must comply with the regulations under IRS section 274.
- Recreational expenses for the benefit of the employee are fully deductible in the situation where the employee is not highly compensated, the employee(s) cannot be deemed a shareholder or owner of the company; they cannot own more than 10% interest in the taxpayer’s business. These expenses are not deductible if the taxpayer has not maintained the property for frequent recreational use by their employees.
- Business meetings and conventions are deductible when the primary purpose of the meeting is the transaction of the taxpayer’s business.
- Meeting expenses of certain tax-exempt organizations are deductible given they are related and necessary for attendance. Such organizations consist of business leagues, a chamber of commerce, real estate boards, board of trades, or professional football leagues.
- Entertainment that is available to the public are deductible given that the entertainment is made available to the general public by such means as television, radio, and newspaper. Also, expenses related with maintaining entertainment facilities such as golf courses, parks and swimming pools are deductible as well under this exception if they are available to the public.
- Entertainment expenses for goods or services (including the use of facilities) that are sold by the taxpayer to customers for an adequate and full consideration need not be directly related to or associated with the active conduct of the taxpayer’s trade or business to be deductible. A deduction is available to a business that operates an entertainment facility that primarily caters to the entertainment needs of a related company if the entertainment company has separate legal existence and charges full consideration for its services.
- Entertainment expenses treated as nonemployee compensation or prize money are fully deductible to the extent that the expenses are included in the gross income of the recipient either as nonemployee compensation for services or as a prize/award.
- Expenses for food and beverages provided to crew members of certain commercial vessels or drilling rigs. These expenses must be provided on either on an oil or gas platform or drilling rig located offshore; on an oil or gas platform or drilling rig located in the United States north of 54 degrees north latitude, or at a support camp that is in proximity and integral to such a platform or rig.
The TCJA has made some changes and created some headaches. But businesses should not arbitrarily cease entertaining clients; rather, they should consider if there is a benefit greater than the lost tax deduction before deciding how to proceed. Likewise, businesses should consider the effect on employee morale and productivity if they stop providing meals or office snacks now that they are only 50% deductible. As with any business decision, while tax considerations are important and should always be considered, they should never be the only factor in deciding how to manage your business.