The Latest Meal and Entertainment Deduction Changes

Source: Selden

Historically, taxpayers could generally deduct 50 percent of business-related meal and entertainment expenses, and in some cases more, but the Tax Cuts and Jobs Act (TCJA) has ushered in a few dramatic shifts that small business owners should be aware of, according to accounting firm Selden Fox.

The Before and After of Exceptions
Under prior law, the following exceptions to the general 50 percent deductibility rule were available. An employer could deduct 100 percent of:

-Meal expenses that were excluded from an employee’s gross income as a “de minimis fringe benefit.” For example, occasional meals provided to employees working overtime qualified for this exception.

-The cost of providing meals to employees, including facility costs as a qualifying employer-operated eating facility. For example, this exception applied to a qualifying company cafeteria.

-Meal and entertainment expenses that were reported taxable compensation to employees. This exception is still available and covers applicable entertainment expenses.

-Food, beverage and entertainment expenses incurred for recreational, social or similar activities that were provided primarily for the benefit of employees (other than certain highly compensated employees) were 100 percent deductible. An example of this would be if your business had a company picnic or holiday party and served food and beverages and provided entertainment. This exception is still available and it still coves applicable entertainment expenses.

Deductions Now Disallowed
Effective for amounts paid or incurred after December 31, 2017, the TCJA disallows deductions for most business-related entertainment expenses, including the cost of facilities used for most of these activities. Specifically, nondeductible expenses now include: tickets to sporting events; license fees for stadium or arena seating rights; private boxes at sporting events; theater tickets; golf club dues, company golf outings for customers, and hunting, fishing and sailing outings.

Deductions Still Allowed
Apparently, you can still deduct 50 percent of the cost of business-related meals with business associates. If so, the time-honored rules for proving that meals are business-related still apply. Once again, this conclusion isn’t completely clear at this time without IRS guidance.

It’s clear that you can still deduct 50 percent of the cost of meals for you or an employee while away from home on business-related travel. Key point: If a hotel or other lodging establishment includes meals in its room charges or you give employees per-diem allowances that are intended to cover meals, you can use a reasonable method to determine the portion of expenditures allocable to meals and subject to the 50 percent deductibility rule.

Tax Planning Considerations
Taxpayers should assess their current expense allowance policies to determine if the unfavorable TCJA provisions warrant changes in policy—especially for entertainment expenses incurred by employees. Accounting system changes may be necessary to separately track employee entertainment expenses and employee business-related meal expenses, which may still be 50 percent deductible.

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