Amongst the reduced tax rates and many other tax saving measures included in the Tax Cuts and Jobs Act is a revenue generator that will require businesses to keep their records a little different this year. The tax act imposes additional limitations on a business’s ability to deduct their meals and entertainment expenses. This change is effective for expenses incurred beginning January 1, 2018.
The allowable deduction for providing food and beverages to an employee at an employer operating eating facility or as a de minimis fringe benefit on the employer’s premise is now limited to 50 percent of the cost of the meal. However, these items become completely nondeductible beginning January 1, 2026. Not only will meals provided at employer operated cafeterias and purchased by employees be impacted, but the new limitation will also impact restaurant owners and similar types of businesses. While it may be difficult for these types of businesses to determine the exact cost of the meals provided to its employees, a reasonable estimate may be appropriate.
Most other meal and beverage expenses will continue to receive a deduction at 50 percent of their cost. These types of meals include those with clients, networking contacts, and prospects. The cost of employee meals while traveling are also included in this category.
On top of the limitations imposed on meal expenses, most entertainment expenses are now completely nondeductible. This includes any activity considered to be entertainment, amusement or recreation such as golf, tickets to a sporting event or a Broadway show. In addition, any membership dues for clubs created for business, pleasure, recreation or social purposes are considered entertainment and therefore nondeductible. Dues paid to trade organizations and business leagues continue to be fully deductible.
There is some good news in that a number of items will continue to be fully deductible even if hosted at an entertainment type of venue. Entertainment activities for the benefit of a business’s employees like holiday parties and summer outings fit into this category. These employee functions also qualify for a 100 percent deduction for the incurred cost of food and beverages. The cost of venues for business meetings for employees, stockholders, agents and directors also qualify for the full deduction. Finally, expenses directly related to the attendance of meetings and conventions of business league and trade organizations remain deductible.
Where many businesses have historically utilized one meals and entertainment expenses account, it is recommended that they now utilize at least three – one for 50 percent deductible meals, a second for nondeductible entertainment, and a third for the fully deductible items. Getting these accounts in place as soon as possible is important to ensure proper accounting for the 2018 tax year.
