Tax Reform impacts meals & entertainment deductions

For many years businesses and employees were able to get tax breaks on significant reductions for business-related meals and entertainment expenses.  But can they still have fun, fun, fun, now that Uncle Sam has taken some deductions away?, (with apologies to the Beach Boys).

The Tax Cuts and Jobs Act (TCJA) of 2017 did more than cut taxes: it lopped the heads off the business entertainment tax deduction and cut back on several deductions involving employer-provided meals to employees.

As this development becomes clear to businesses and employees there’s some surprise, perhaps shock, and even a bit of outrage. Businesses and employees that spend a lot of money on client entertainment – and as such made extensive use of the entertainment deduction – are unhappy to learn things have changed.  

One the one hand, businesses did receive significant tax advantages from the TCJA’s passage: reduction of the corporate tax rate to a flat 21% from rates that ranged up to 35%; more business-beneficial deduction rules; and elimination of the corporate alternative minimum tax, to name three.

With the other hand the government took back some long-established breaks, among them the way deductions are determined for meals and entertainment. The Joint Committee on Taxation estimates that eliminating these deductions will mean $23.5 billion in tax revenue to the government.  That’s understandably aggravating for people who have made use of these deductions throughout their business life.

As with many areas within the tax code, the definitions and descriptions under meals and entertainment were fairly wide-ranging. For example, the tax code’s definition of meals (food and beverages) and entertainment: “Any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity.”

Within the regulations was a good deal of leeway to identify the business purpose. The TJCA’s action was to make such deductions much more specific and limited. A few examples:

• Taking a client to lunch or dinner, previously 50% deductible is now disallowed.

• Employee meals while on business travel remain 50% deductible.

• Working meals for employees; meals served at a Lunch & Learns; coffee and employer-provided breakroom snacks; and cafeteria meals and operating expenses, are 50% deductible, down from 100%. After the year 2025 this deduction disappears entirely.

• Meals & entertainment treated as compensation (rather than a benefit) remains 100% deductible.

• Meals served in a luxury booth, such as at a football game, are now non-deductible.

• Meals & entertainment for employee social events (such as holiday parties or picnics) remain 100% deductible.

The IRS hasn’t issued its final rules on these subjects; however, this is clear: businesses and employees no longer have the latitude of the broad definitions and interpretations under the old law.

That means while the law is now simpler, it’s going to take more work for everyone – taxpayers, tax advisors, accountants, and chief financial officers -  to enable themselves and their clients to taste the greatest possible business meal tax deductions.      

 This article originally appeared in the Knoxville News Sentinel