The “Tax Cuts and Jobs Act” (the Act) made significant changes to the provisions that affect a business’s ability to deduct meals and entertainment (M&E) expenses. Of note, the Act eliminated an employer’s ability to deduct entertainment expenses whether business related or not.
The Act also significantly limited an employer’s ability to deduct expenses associated with de minimis meals, including meals provided at an employer-operated eating facility or meals provided for the convenience of the employer.
The following highlights what taxpayers need to consider to be fully compliant with the changes to Meals and Entertainment expenses.
Prior to December 31, 2017, Section 274 allowed a deduction for 50% of the meals and entertainment expenses incurred by a business, so long as these expenses were ordinary, necessary and directly related to the active conduct of the taxpayer’s trade or business. Additionally, a taxpayer was permitted to deduct 100% of certain qualified expenses, including meals provided by an in-house cafeteria or meals provided for the convenience of the employer (on employer’s premises) and various other de minimis fringe benefits, such as qualified transportation fringe benefits. Furthermore, a 100% deduction was allowable for expenses incurred for recreational, social, or activities alike (including facilities, but not club dues) primarily for the benefit of employees (other than employees who are highly compensated).
The amendments made to Section 274 under the Act significantly limit a taxpayer’s ability to deduct meals and entertainment expenses. These changes are effective for amounts paid or incurred on or after January 1, 2018.
Business-related meals remain subject to a 50% disallowance. New Section 274(o) expanded the 50% limitation to expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements. For tax years beginning after December 31, 2025, 100% of an employer’s deduction for such expenses is disallowed. However, a 50% deduction may still be allowed for de minimis fringe meals if they fall within the exception for business food and beverages for employees under Section 274(n)(2)(A), detailed below and Section 274(e)(1) relating to food and beverage expenses on the business premises of the taxpayer primarily for employees.
Under the Act, no deduction is allowed for all forms of entertainment (e.g., golf outings, fishing, sailing, sporting events, hunting, theater tickets, license fees paid to sporting arenas, golf club dues, etc.) These entertainment expenses are nondeductible even if business is discussed at the event. Taxpayers may still deduct 50% of food or beverages incurred at these events, but only if they can prove that business was conducted.
Qualified Transportation Fringes
Under the Act, Section 274(a)(4) bars a deduction for employee qualified transportation fringe benefits (i.e., parking and mass transit). These expenses are no longer deductible, however, if such benefits are received by an employee, they continue to be excluded from the employee’s income. Additionally, Section 274(l)(1) disallows a deduction for costs incurred for providing transportation from an employee’s residence to work except if it has been provided for the safety of the employee.
Section 274(n)(2)(A) retains several exceptions to the percentage limitations. The following expenses remain 100% deductible:
- Certain expenses that are treated as compensation to an employee of the taxpayer.
- Expenses paid or incurred in connection with the performance of services for another person (other than an employer), under a reimbursement or other expense allowance arrangement if the taxpayer accounts for the expenses to such person
- Expenses for recreational, social, or similar activities primarily for the benefit of employees.
- Expenses for goods, services, and facilities made available by the taxpayer to the public.
- Expenses for goods or services (including the use of facilities) sold to customers in a bona fide transaction for adequate and full consideration
- Expenses paid by the taxpayer that are includable in income of a recipient who is not an employee.
Additionally, the following entertainment expenses are 100% deductible and meal expenses are 50% deductible:
- Expenses for food and beverages furnished on the taxpayer’s business premises provided primarily for the benefit of employees (50% deductible)
- Expenses that are directly related to business meetings of employees, stockholders, agents, or directors. (100% deductible)
- Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 501(c) (6) (e.g., business leagues, chambers of commerce, real estate boards, and boards of trade) (100% deductible)
If not already in place, businesses should create separate general ledger accounts for 50% deductible business meals, nondeductible entertainment and 100% deductible recreational, social, or similar activities (including facilities) that primarily benefit employees. Additionally, taxpayers should assess whether changes to their expense or reimbursement policies are warranted.
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