Business Deductions Under the New Tax Law: Meals, Travel & Entertainment
The recently-passed Tax Cuts and Job Act, which has effectively replaced The 1986 Tax Act, presents significant changes in our tax legislation and thus our application of tax rules. A key change affects business entities and how a business should treat expenses for meals, travel & entertainment for tax purposes as of January 1, 2018. While the deductibility of these items has not changed completely as of today, there are noteworthy revisions that warrant discussion.
Prior to January 1, 2018, employers were able to fully deduct meals and beverage expenses provided for the convenience of the employer, while on the employer’s business premises; these meals and beverages were tax-free to the recipient employee. Under the new law, they are still tax-free to the recipient employee, but are only 50% deductible for the employer for tax purposes. After the year 2025, the meals and beverage expense deduction will be nondeductible for the employer altogether. The deduction for any qualified fringe benefit transportation of employees of a business, for commuting between home and work, is disallowed except as necessary for the safety of the employee.
Prior to January 1, 2018, a business expense for taking a client out to a basketball game or for a round of golf, for example, was 50% deductible for tax purposes. Under the new law, entertainment expenses are no longer deductible. Broadly defined, “entertainment expenses” include activities that are considered amusement or recreation, and also include membership dues for clubs organized for pleasure, business, social purposes and recreation. Expenses related to charitable events are nondeductible as well, except the portion of the cost that can be allocated to charity and which will be deductible as a charitable contribution.
The good news is that not all of the provisions for meals, travel & entertainment were changed under the new law. Employers can still deduct 100% of the cost of office holiday parties or departmental gatherings and outings so long as the activities primarily benefit employees (other than highly compensated employees). Meal costs incurred by employees traveling on company business is 50% deductible so long as the expense is not lavish or extravagant. The cost of taking a client out to lunch and dinner is still 50% deductible as long as the expense is not lavish or extravagant.
Taxpayers should examine the impact of the new law on internal and external entertainment activities. For business meal expenses, it is recommended that you keep a log and record the date of the lunch and/or dinner, names of individuals in attendance, the purpose of the meeting, and what was discussed. If audited by the IRS, this will serve as a valuable support for those expenses.
As always, it is recommended that you discuss with your accountant or advisor any concerns or questions related to how the new tax legislation might affect you or your business specifically; and you should be aware that while this blog provides a summary of the business deduction provisions under the new guidelines of the Tax Cuts & Jobs Act, it should not be treated as a full-coverage guide with which to make determinations and decisions. For more information on this topic, or our services, please contact us at firstname.lastname@example.org or (212) 245-5900.
Deven M. Conner, CPA, EA is a Tax Professional with FF&F. He is an IRS Enrolled Agent and has over 10 years of combined tax and public accounting experience comprised of family office groups, private equity firms, and forensic accounting. Deven has a strong background in individual, fiduciary, and partnership taxation. His diversified experience in the private and public sectors, which include a Big Four firm and top mid-size public accounting firm, serves as a solid foundation for his unique and comprehensive understanding of taxation.