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Changes to Meal and Entertainment Expenses under Tax Reform

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Rödl & Partner Tax Matters Vol 2018 – 9, published in November 2018

 

The Tax Cuts and Jobs Act made some significant changes to the deductibility of meals and entertainment. Since the changes are effective for tax years beginning after December 31, 2017, it is important for taxpayers to learn the new rules now and take action to make sure these transactions are adequately identified and segregated in their accounting systems. Below is detailed guidance regarding the treatment of different types of meal and entertainment expenses as well as a quick reference chart.

 

Entertainment Expenses

Under prior law, entertainment expenses that were directly related to the taxpayer's business were generally deductible, subject to an automatic 50% haircut. In the post-tax reform world, no deduction is allowed for:
  • Any expense related to an activity that is generally considered to be entertainment, amusement or recreation,
  • Membership dues for any club organized for business, pleasure, recreation or other social purposes, or
  • A facility used in connection with any of the above items.

 

Certain exceptions to the disallowance rule that were in effect prior to tax reform are still applicable. Thus, the following items are generally still deductible:
  • Food, beverages and facilities connected therewith, furnished on the business premises of the taxpayer primarily for the taxpayer's employees
  • Expenses for goods, services and facilities to the extent that the portion of the expenses that is related to entertainment, amusement or recreation is treated as taxable compensation to the taxpayer's employee (i.e. included in the employee's W-2 wages)
  • Expenses paid or incurred by the taxpayer in connection with the performance of services by the taxpayer for another person under a reimbursement or other expense allowance arrangement, assuming,
    • If the services are performed for an employer, the employer does not treat such expenses as taxable compensation to the employee; or
    • If the services are performed for a person other than an employer, the taxpayer accounts to such person for the expenses
  • Expenses for recreational, social or similar activities, including facilities, primarily for the benefit of employees (other than certain highly compensated employees)

  • Expenses directly related to business meetings of the taxpayer's employees, stockholders, agents or directors

  • Expenses directly related and necessary to attendance at a business meeting or convention of a business league, chamber of commerce, real estate board, board of trade or an organization exempt from taxation under section 501(a)

  • Expenses for goods, services and facilities made available by the taxpayer to the general public

  • Expenses for goods, services or facilities which are sold by the taxpayer in a bona fide transaction for adequate and full consideration

  • Expenses paid or incurred by the taxpayer for goods, services and facilities to the extent that the expenses are includible in the gross income of the recipient of the entertainment, amusement or recreation who is not an employee of the taxpayer as compensation for services rendered or as a prize or award.

 

Employer-Operated Eating Facilities

Prior to the passage of the tax reform act, a taxpayer's deduction for business meals was generally limited to 50% of the amount incurred. This limitation did not apply to expenses for food and beverages that were excludible from the recipient's gross income as nontaxable de minimis fringe benefits, including the value of meals provided to employees at an employer-operated eating facility. These food and beverage expenditures are now subject to the 50% limitation until after 2025 when they are scheduled to become completely nondeductible.

 

Client business meals

Under prior law, client business meals were technically considered entertainment, but this distinction was irrelevant from a practical standpoint given that both meals and entertainment were subject to a 50% disallowance. Therefore, when tax reform was passed and entertainment expenses became non-deductible, it appeared that certain types of business meals would also be non-deductible. The IRS has now provided guidance that business meals are still 50% deductible if:

  1. the expense is an ordinary and necessary expense paid or incurred during the tax year in carrying on any trade or business;
  2. the expense is not lavish or extravagant under the circumstances;
  3. the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
  4. the food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. for food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.


Below is a chart summarizing many common meal and entertainment expenditures and the current rules for deductibility.

 

EVENT 2018 EXPENSES (NEW RULES) CITATION
Office Holiday Party or Picnic100% deductible§§274(e)(4), 274(n)(2)(A)
Client Business Meals50% deductible if business is conducted, taxpayer is present, and not lavish or extravagant

§§274(k)(1), 274(n)(1),

162(a)

Entertainment-related

Meals

No deduction (e.g, meals incurred when no business is conducted, potentially at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips)§274(a)(1), Reg. §1.274-2(b)(1)(i)

Transportation to/from

Restaurant for Client

Business Meal

100% deductible

Committee Reports

on P.L. 99-514 (TRA of 1986)

 

Sporting Event Tickets

 

No deduction

 

§274(a)(1), §170(l), Committee

Reports on P.L. 99-514

Club MembershipsNo deduction§§274(a)(1), 274(a)(2), & 274(a)(3)

Meals Provided for the

Convenience of Employer

50% deductible

(nondeductible after 2025)

§§274(e)(1), 274(o)(2)

Meals Provided to

Employees Occasionally and Overtime Employee

Meals

50% deductible

(nondeductible after 2025)

§§274(e)(1), 274(o)(1)

Water, Coffee, and

Snacks at the Office

50% deductible

(nondeductible after 2025)

§§274(e)(1), 274(o)(1)

Meals in Office During

Meetings of Employees, Stockholders, Agents, or Directors

50% deductible§§274(e)(5), 274(n)(1)

Meals During Business

Travel

50% deductible

§§162(a)(2), 274(n)(1);

Reg. §1.274-2(f)(2)(iv)(B)

Meals at a Seminar

or Conference, or at a

Business League Event

50% deductible

1986 TRA Bluebook, at 64 (1987); §§274(e)(6),

274(n)(1)

Meals included in

Charitable Sports

Package

50% deductible (the exception provided under former §274(n)(2)(C), referring to former §274(l)(1)(B), was repealed)

 

§274(n)(1)

 

Meals Included as

Taxable Compensation

to Employee or

Independent Contractor

100% deductible

§§274(e)(2), 274(e)(9),

274(n)(2)(A)

Meals Expenses Sold to a Client or Customer (or Reimbursed)100% deductible

§§274(e)(3), 274(e)(8),

274(n)(2)(A)

Food Offered to the

Public for Free (e.g., at a Seminar)

100% deductible§§274(e)(7), 274(n)(2)(A))

 

Please contact your Rödl & Partner tax adviser regarding any questions you may have on this or any other tax topic.

 

 

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