Tax Reform Series #5: Meals & Entertainment Deduction Limitations
The Meals and Entertainment deductions have stricter limitations under the Tax Cuts and Jobs Act of 2017 (“TCJA”). Our latest Tax Reform Advisor focuses on changes that were made to Internal Revenue Code Section 274 “Disallowance of Certain Entertainment, Amusement, Recreation or Qualified Transportation Fringes.”
In general, meals, entertainment, amusement, and recreation expenses prior to 2018, were partially deductible if they were directly related to or associated with the active conduct of a trade or business. These expenses were subject to a 50% limitation unless they fell under a series of enumerated exceptions. The entertainment, amusement, and recreation expenses were also required to be directly related to – precede or follow – a substantial bona fide business discussion. The TCJA terminated the deductibility of entertainment, amusement, and recreation expenses eliminating their deductibility after December 31, 2017.
The TCJA amendments to the law itself have caused some confusion with respect to the application of the law. As often is the case, further guidance needs to be issued to add clarity. Based on recent IRS comments, the following is a reasonable understanding of the current deductibility of business meals in 2018 and following until further guidance is issued.
As noted above, meals and pre-TCJA entertainment expenses were generally subject to a 50% limitation. Under the TCJA the following exceptions are still fully deductible:
- Expenses for services, goods, and facilities that are treated as compensation for withholding tax purposes (for example, meals paid for by the company while relocating an employee).
- Recreational expenses primarily for employees who are not highly compensated (ex: summer outings, holiday party, etc.).
- Expenses for goods, services, and facilities made available to the public.
- Expenses for entertainment sold to customers in a bona fide transaction for adequate consideration.
- Expenses for goods, services, and facilities that are furnished to nonemployees as entertainment, amusement or recreation and are includible in their income and reported on a form 1099-MISC (or would be required except that the amount is under $600) by the taxpayer.
As we await further clarification and guidance to be issued, here are some additional tips and suggestions for categorizing meals as compared to entertainment meals and other items that you may question.
- In your general ledger system, break-out the categories of expenses into different accounts as you are entering them into your records. You can put these expenses into at least three different accounts: entertainment expenses (as non-deductible expenses), 100% deductible items, and 50% deductible items. This will help save time at year end in providing the detail to your tax accountant.
- When you are looking at an expense for a meal with an activity, consider posting the meal portion to a separate account that can be reviewed easily at a later date assuming that further guidance is issued. Depending on your facts and circumstances, consider establishing several like accounts for other unique or unusual circumstances. Segregating the expenses into unique general ledger accounts will make it easier to go back and reclassify if favorable guidance is received later in the year.
Contact us if you have questions about these new limitations or best practices for capturing these expenses.
Melissa G. Dunham?>
CPA, MTax, MBA
Robert M. Burak?>
About the Authors
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