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How Has the Tax Cuts and Jobs Act Changed the Deductibility of Meals and Entertainment?

How Has the Tax Cuts and Jobs Act Changed the Deductibility of Meals and Entertainment?

Feb 28, 2018

As they say, better late than never. I was one year late on when I thought we would have tax reform. I am not going to explain all the changes that went into effect with the Tax Cuts and Jobs Act. There are numerous changes that will benefit taxpayers. Yet, as we know, for every tax benefit received, there is a cost. I want to explain in further detail one of those costs. The Tax Cuts and Jobs Act changed Internal Revenue Code Section 274 that defines the tax deductibility of entertainment expenses. I cannot imagine that the loss in deduction from meals and entertainment expenses will nullify the tax savings from the other benefits taxpayers will experience. It will, however, change how you record these expenses in your general ledger. 

 

The previous law allowed a 50% deduction for meals and entertainment expenses if the expense was “directly related or associated with the active conduct of the taxpayer’s business or income-producing activity.” In other words, you needed to discuss business with your customer while at the meal or entertainment event. 

 

The Tax Cuts and Jobs Act repealed the rule that allowed a deduction for entertainment, amusement, or recreation expenses even if it is directly related to the active conduct of a taxpayer’s business. The Internal Revenue Code Section 274 now states that “in general no deduction shall be allowed for any activity that is considered entertainment, amusement, or recreation.” The facility used in connection with the activity is also denied a deduction. This includes the membership fees to clubs organized for business, pleasure, or recreation. 

 

The types of activities that are no longer deductible include but are not limited to: golfing, sporting events, hunting trips, the right to purchase college athletic seats, on-site athletic facilities, and any performance tickets.

 

The Tax Cuts and Jobs Act also limited the deduction related to all meals. The general rule is the deduction for all business meals is limited to 50% (this assumes that the meal is not lavish or extravagant and the taxpayer or its employee is present at the meal). This includes the business lunches with customers as well as any meals provided for the convenience of the employer. The lunch brought in for a training session is now 50% deductible instead of fully deductible. The Tax Cuts and Jobs Act further limits the deduction for meals provided through an in-house cafeteria and for the convenience of the employer, and these will become nondeductible starting in 2026. 

 

Do not worry. There are some exceptions to the 50% deductible rule. The Tax Cuts and Jobs Act still allows the holiday party to be fully deductible. It did not remove the exception for expenses for recreation, social, or similar activities for the benefit of the taxpayer’s employees. The event must be for more than the highly compensated employees. In addition, any food made available to the public is fully deductible. For example, cookies and coffee in the lobby are still okay.    

 

I am recommending that you create an entertainment account separate from your meals account to allow for better tracking of expenses. You can also close your 100% deductible meals account because it will no longer exist. 

 

The chart below summarizes the changes between the new rules and old rules.

 

 

Old Rules

Before 1/1/2018

New Rules Starting 1/1/2018

Entertainment

 

 

Sporting tickets

50% deductible

0% deductible

Golf fees

50% deductible

0% deductible

Theater tickets

50% deductible

0% deductible

Club dues

0% deductible

0% deductible

Meals

 

 

Lavish business meal

0% deductible

0% deductible

Business meals

50% deductible

50% deductible

Meal with no business discussed

0% deductible

0% deductible

Employees’ meals while traveling

50% deductible

50% deductible

Meals provided for convenience of the employer

100% deductible

50% deductible

Meals provided during meetings at the company location

100% deductible

50% deductible

Meals provided for employees working overtime

100% deductible

50% deductible

Office holiday party/summer picnic

100% deductible

100% deductible

Food, services, and facilities made available to the public (e.g., donuts and cookies in the lobby)

100% deductible

100% deductible

Reimbursed expenses of employees or customers

100% deductible

100% deductible

Expenses treated as compensation to the employee

100% deductible

100% deductible

 

Author(s)

Jessica Mac Naughton
Jessica H. Mac Naughton, CPA
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