The new Tax Cuts and Jobs Act (TCJA) made some significant changes to a popular perk for business owners: the deduction for meals and entertainment expenses.
Meals and Entertainment Expenses Deduction Prior to TCJA
Prior to the TCJA, the Tax Code generally allowed businesses to deduct 50% of meals and entertainment expenses, with a few exceptions. The definitions were pretty broad. IRS Publication 463 defines meals as “amounts spent for food, beverages, taxes and related tips” and entertainment as “any activity generally considered to provide entertainment, amusement or recreation. Examples include entertaining guests at nightclubs; at social, athletic and sporting clubs; at theaters; at sporting events; on yachts or on hunting, fishing, vacation and similar trips.”
One notable exception to the 50% limit pertained to meals provided to an employee for the convenience of the employer on the employer’s business premises. Those meals were 100% deductible by the employer and considered a tax-free de minimis fringe benefit for the employee.
Meals and Entertainment Expenses Deduction under TCJA
Beginning in 2018, business-related entertainment expenses are no longer deductible. Meal expenses are still 50% deductible, but the 50% limitation now also applies to meals provided on the employer’s premises for the convenience of the employer.
Meal expenses for recreational, social or similar activities, primarily for the benefit of employees, are still 100% deductible; so a business can still fully deduct costs for office holiday parties, company picnics, etc. Expenses for meals treated as employee compensation and reported on the employee’s W-2 are also fully deductible by the employer.
The following table provides a summary of deductible meals and entertainment expenses before and after the TCJA:
|2017 Rules||2018 Rules|
|Office Parties||100% Deductible||100% Deductible|
|Entertaining Clients – Meals||50% Deductible||50% Deductible|
|Entertaining Clients – Entertainment||50% Deductible||Not Deductible|
|Employee Travel Meals||50% Deductible||50% Deductible|
|Meals Provided for
Convenience of Employer
|100% Deductible||50% Deductible|
Keep in mind that the TCJA also provides for many provisions to change after 2025. After 2025, the cost of meals provided for the convenience of the employer will no longer be deductible.
For years, many business owners were not aware that certain business meals were in fact 100% deductible. Most coded all meals and entertainment expenses to one account, and the 50% limitation would be applied. With the changes to these deductions, it’s more important than ever for business owners to understand their meals and entertainment expenses and ensure they are properly categorized to avoid any lost tax savings.
If you have any questions about the changes to the meals and entertainment expenses deduction, please contact BSSF today!
ABOUT THE AUTHOR
Matt is a Senior Tax Manager with Brown Schultz Sheridan & Fritz and a key member of the Firm’s Tax Department. Matt has over ten years of experience servicing closely held and family-owned businesses in numerous industries, including craft beverage, manufacturing, distribution and construction/real estate.