Tax reform: Meals and entertainment changes for businesses in 2018

January 31, 2018|Brian Strnad

Updated Oct. 4, 2018: After the initial confusion around the deductibility of business meals with clients, business associates, referral sources or business prospects, the IRS provided interim guidance that business meals are generally 50% deductible.

Background

In general, the Tax Cuts and Jobs Act of 2017 places stricter limits on the deductibility of business meals and entertainment expenses. The law was signed December 22, 2017. The changes to deductions for meals and entertainment expenses are effective for amounts paid or incurred on or after January 1, 2018.

Prior to the passing of the tax reform legislation, a business generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are now 100% not deductible. The interim guidance issued by the IRS on October 3, 2018 clarified that certain business meals with clients, prospects, referral sources, etc. are 50% deductible. This is news welcomed by many businesses that thought the deduction had been eliminated.

In particular, the IRS guidance reads as follows:

  • Taxpayers may continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverage expenses are ordinary and necessary in carrying on the trade or business and are not considered lavish or extravagant under the circumstances.
  • The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
  • Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event or if the cost of the food and beverages are stated separately from the cost of the entertainment on one or more bills, invoices or receipts.

Meal expenses incurred while traveling on business and certain other business-related meals are still 50% deductible. The 50% disallowance rule also now applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer; until 2025, when these meals become 100% nondeductible.

What this means (Updated Oct. 4, 2018)

You will likely need several general ledger accounts to accommodate the change in tax law, to help ensure an easier, more efficient and accurate tax return preparation process. We suggest having the following accounts to accommodate the current tax law for meals and entertainment:

Meals and entertainment – 0% deductible   

  • All entertainment, including admission fees, tickets, and food and beverage unless the food and beverage is separately stated from the cost of the entertainment on one or more bills, invoices, or receipts (See section titled Meals – 50% deductible below) or it meets one of the exceptions under the section titled, “Meals and entertainment – 100% deductible.”

Meals – 50% deductible

  • Business meals: meals with a current or potential business customer, client, consultant, or similar business contact;* 
  • Employee travel meals: Meals incurred by an employee or self-employed individual while traveling away from home if their duties require them to be away from the general area of their tax home substantially longer than an ordinary day’s work, and they need to sleep or rest to meet the demands of their work while away from home while out of town;
  • Meals for employees, stockholder business meetings: meals directly related to business meetings of employees, stockholders, agents or directors;
  • Meals for meetings of business leagues: meals directly related and necessary for attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade that are exempt from taxation under section 501(a).

Meals for convenience of employer – 50% deductible

This is a separate account because these become 0% deductible in 2025 and this prevents having to change accounting and expense reporting systems in the future.

  • Meals served to employees who are required to staff their positions during breakfast, lunch, and/or dinner times; meals served to employees at in-office cafeterias;
  • Food and meal costs for employees who are required to live on premises for the convenience of the employer.

Meals and entertainment – 100% deductible

  • Expenses treated as compensation: meals, entertainment, amusement and recreational expenses treated as compensation and included as wages for income tax withholding purposes;
  • Reimbursed expenses: Expenses paid or incurred by the taxpayer, in connection with services performed for another person or business, under a reimbursement or other expense allowance arrangement with the person or business, if the taxpayer accounts to such person or business by providing a breakdown of the expenses;
  • Recreational, etc., expenses for employees: expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than highly compensated employees);
  • Items available to public: expenses for goods, services, and facilities you or your business make available to the general public;
  • Entertainment sold to customers: expenses for entertainment goods, services and facilities sold to customers;
  • Expenses includible in income of persons who are not employees: expenses paid on behalf of nonemployees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award;
  • De minimis fringe benefit food and beverage: food and beverage, the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employer’s employees) so small as to make accounting for it unreasonable or administratively impracticable. Potentially only 50% deductible; however, it appears not to be what Congress intended. Technical corrections may provide for 100% deductibility.

You will need to revise expense reporting systems to accommodate the new tax law and instruct employees on these changes.

Since the new tax law was passed at the end of 2017, there was not a lot of time to implement these changes. This may require you to go back and clean up the recording of expenses already paid or incurred after December 31, 2017 to ensure proper classification for preparation of your tax return for your tax year ending in 2018.

View a printable PDF of the tables→ 

The following table compares the rules before and after the new tax law.

Expenses 2017 Rules 2018 Rules (NEW)
Entertaining a current or potential business customer, client, consultant, or similar business contact Meals: 50% deductible

Food and beverage 50% deductible if separately stated from the cost of the entertainment on one or more bills, invoices or receipts.* 

No deduction for entertainment expenses

Sporting, concert or other events: 50% deductible at face value on non-luxury ticket
Tickets to qualified charitable events: 100% deductible
Other entertainment: 50% deductible
Employee travel meals (See definition below) 50% deductible 50% deductible
Meals provided for the convenience of the employer 100% deductible provided the meals are excluded from the employee's gross income as de minimis fringe benefits. Otherwise, 50% deductible. 50% deductible until 2025. After 2025, nondeductible. 
Employee meals qualifying as a de minimis fringe benefit (i.e. coffee, monthly donuts for birthdays) 100% deductible Potentially only 50% deductible; however, appears not to be what Congress intended. Technical corrections may provide for 100% deductibility.
Meals and entertainment expenses treated as compensation 100% deductible 100% deductible
Reimbursed meals and entertainment expenses 100% deductible provided the taxpayer accounts to such person 100% deductible provided the taxpayer accounts to such person
Office holiday parties, picnics, summer outings 100% deductible 100% deductible
Business meetings of employees, stockholders, agents or directors 50% deductible 50% deductible
Expenses for attendance at a business meeting or convention of a section 501(c)(6) business league, chamber of commerce, real estate boards, and boards of trade 50% deductible 50% deductible
Items available to the general public as a means of advertising or promoting goodwill in the community 100% deductible 100% deductible
Expenses includible in income of persons who are not employees—prizes or awards 100% deductible 100% deductible

Employee travel meals

Travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession or job. You're traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day's work, and you need to get sleep or rest to meet the demands of your work while away.

The following examples illustrate differences in the rules before and after the new tax law.

Examples 2017 Rules 2018 Rules (NEW)
Lunch or dinner with a client in town (not away from home) Meal: 50% deductible Meal: 50% deductible*
Lunch or dinner with a client/customer while traveling away from home Employee meal and client/customer meal: 50% deductible

Employee meal: 50% deductible

Client/customer meal: 50%*

Two employees have a working lunch at a restaurant Meal: 50% deductible Meal: 50% deductible
Traveling away from home Meal: 50% deductible Meal: 50% deductible
A large hospital has an on-site cafeteria where all of its 250 employees may eat free during working hours. Of the 250 employees, 234 are provided the meals because they must be available for emergencies. Because substantially all of the hospital's employees must eat at the cafeteria, all of the employees may exclude the value of the meals from gross income. Cost of providing meals is 100% deductible. Cost of providing meal is 50% deductible
Company has a manager meeting at a local (no overnight stay) hotel convention center. More than 50% of the employees attending are highly compensated employees. Lunch is served to limit the lunch break and also drinks and hors d'oeuvres are served after the meeting.

Lunch: 100% deductible since for the convenience of employer.

Drinks and hors d’oeuvres: 50% deductible as associated entertainment

Lunch: 50% deductible as an employee business meeting

Drinks and hors d’oeuvres: Nondeductible since primarily for benefit of highly compensated employees

Company has an all employee meeting at a local hotel convention center with drinks and hors d’oeuvres served after. 100% deductible as recreational expenses for employees 100% deductible as recreational expenses for employees
Company has a holiday party for employees and customers. 100% deductible for portion allocated to employees

50% deductible for portion allocated to customers
100% deductible for portion allocated to employees

Portion allocated to customers is 50% deductible*
An independent manufacturer sales rep is paid commission plus a reimbursement of expenses, and they provide the manufacturer a detail accounting of those expenses. Reimbursed expenses are 100% deductible by the sales rep or netted against the reimbursement from the manufacturer.

Limitation on the deductibility of the meals and entertainment is shifted to the manufacturer.
Reimbursed expenses are 100% deductible by the sales rep or netted against the reimbursement from the manufacturer.

Limitation on the deductibility of the meals and entertainment is shifted to the manufacturer.
Law firm charges its clients fees plus expenses (i.e. travel, lodging and meals, etc.) and provides their clients with detail of the expenses on the invoice sufficient for client to determine deductibility of the expense. Reimbursed expenses are 100% deductible by the law firm or netted against the reimbursement from the client.

Limitation on the deductibility of the meals and entertainment is shifted to the client.
Reimbursed expenses are 100% deductible by the law firm or netted against the reimbursement from the client.

Limitation on the deductibility of the meals and entertainment is shifted to the client.
Company sponsors a table at a charitable event attended by employees and customers. Value of meal is 50% deductible.

Remainder is a charitable contribution, unless the taxpayer received something in return which can be classified as an “ordinary and necessary business expense,” in which case the cost is deductible as advertising.
*Value of meal: 50% deductible if no entertainment or if separately stated from the cost of the entertainment on one or more bills, invoices or receipts.

Remainder is a charitable contribution, unless the taxpayer received something in return which can be classified as an “ordinary and necessary business expense,” in which case the cost is deductible as advertising.

Golf sponsorships and outings

Example: Golf scramble event
Team (foursome) | $1,0001
Individual | $250

Sponsorship opportunities
Life sponsor | $2,500

  • Includes one foursome

 

1For tax purposes, deductible contribution is $360 per team.

Meals and golf 50% deductible: $640 ($1,000 - $360 deductible contribution) per foursome that participated or $160 per individual golfer is meals and entertainment.

Remainder is a charitable contribution, unless the taxpayer received something in return which can be classified as an “ordinary and necessary business expense,” in which case the cost is deductible as advertising.
Golf and meal nondeductible because not separately stated on invoice: $640 ($1,000 - $360 deductible contribution) per foursome that participated or $160 per individual golfer is nondeductible.*

Remainder is a charitable contribution, unless the taxpayer received something in return which can be classified as an “ordinary and necessary business expense,” in which case the cost is deductible as advertising.

Golf sponsorships and outings

Example: Golf scramble event
Team (foursome) | $1,0001
Individual | $250

Sponsorship opportunities
Life sponsor | $2,500

  • Includes one foursome

 

1For tax purposes, deductible contribution is $360 per team and the cost of the meal is $25 per golfer.

Meals and golf 50% deductible: $640 ($1,000 - $360 deductible contribution) per foursome that participated or $160 per individual golfer is meals and entertainment.

Remainder is a charitable contribution, unless the taxpayer received something in return which can be classified as an “ordinary and necessary business expense,” in which case the cost is deductible as advertising.
Cost of meal of $100 is 50% deductible since separately stated on invoice. Cost of golf of $540 is nondeductible per foursome that participated or $25 is 50% deductible meal and $135 nondeductible golf per individual golfer.*           

Remainder is a charitable contribution, unless the taxpayer received something in return which can be classified as an “ordinary and necessary business expense,” in which case the cost is deductible as advertising.

Chart updated as of 10.09.18 

*The IRS provided additional interim guidance on October 3, 2018.

If you have any questions, please contact your Schenck representative.


Brian Strnad, CPA, is a shareholder at Schenck. He has extensive experience in tax planning for closely held businesses and individuals. Brian also provides tax research and tax planning for businesses in the manufacturing, construction, real estate and service industries.



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