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Sikich Series on Tax Reform – Meal and Entertainment Deductions

Sikich

Jan 30 2018

4 min read

Congress Puts Businesses on a Diet

The recently adopted “Tax Cuts and Jobs Act” is a comprehensive and complex piece of tax legislation. It is the most significant tax reform package in over thirty years. There are a variety of provisions impacting businesses and individuals. While much of the attention has focused on the lower tax rates for corporations and the new deduction for pass-through businesses, and also the expansion of “CapEx” deductions, there are a number of other provisions impacting businesses. Some changes are more significant, while others are smaller in scope. This article addresses changes made in the deduction of meals and entertainment expenses.

Meals and entertainment expenses (“M&E”) are a common outlay for most businesses. The tax treatment for these expenditures has changed over the years, and the treatment changed again with the recent tax bill. This article will cover some of the changes made by the bill; point out M&E items that weren’t changed; offer other observations; and provide several practical applications.

The chart below provides an overview of selected changes made to the deductions for meal and entertainment expenses by the Tax Cuts and Jobs Act.

ITEM	TAX TREATMENT UNDER PRIOR LAW	TAX TREATMENT UNDER NEW LAW	EFFECTIVE DATE OF CHANGE
Entertainment. Entertainment directly related to active conduct of taxpayer’s trade or business.	50% deductible	0% deductible	Amounts incurred or paid after December 31, 2017
Business Meals. Meals incurred in operating the taxpayer’s trade or business (e.g., meals consumed by employees on work travel)	50% deductible	50% deductible	No Change
Company Picnics, Holiday Dinners.	100% deductible	100% deductible	No Change
Meals for the Convenience of the Employer. Covers meals provided on or near business premises.	100% deductible	50% deductible	Amounts paid or incurred after December 31, 2017
Meals Provided at Employer Facilities. Includes cafeteria facilities and other meals at employer.	100% deductible	50% deductible	Amounts paid or incurred after December 31, 2017, and these will be non-deductible for amounts paid or incurred after December 31, 2025

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Several observations on these changes:

Entertainment with Meals. While business meals continue to be 50% deductible, if meals are part of an entertainment function, it is unclear under the new law how to treat these expenses. For instance, if an evening consists of entertainment (e.g., a show or a game) and food is served as part of the event, will the entertainment be non-deductible and the food/meal 50% deductible? Or, will the entire evening activities be non-deductible as entertainment was involved? In the past, this distinction was not significant as both entertainment and meals were subject to a 50% deduction disallowance. But this will change in 2018 and going forward. The IRS will likely provide guidance to clarify these matters related to M&E.
Reimbursed Items. If a business incurs entertainment and meals expenses, but is then reimbursed by another party for these amounts, what happens? It depends. If the party that initially incurred these expenses provides the details to the reimbursing party of these expense and identifies these amounts as subject to the meals and entertainment disallowance rules, then the initial party can deduct 100% of these costs. The deduction limitation then reverts over to the reimbursing party.
Tracking Entertainment and Meal Expenses. With these recent changes that begin in 2018, businesses should set up separate accounts in their general ledger to track these various expenses. It is easier to start tracking these items now, rather than wait until the year is over. For example, you could use the following accounts in a company’s general ledger:
- M&E – 0% deductible
- M&E – 50% deductible
- M&E – 100% deductible

Summary. While fewer deductions are available for meals and entertainment expenses for businesses due to changes made by the tax bill, the net tax impact is not as significant due to the overall lower tax rates beginning in 2018. As noted above, the IRS will need to issue guidance to address each of these changes, and the analysis and tax treatment for these expenses could differ based on this guidance. Please contact your Sikich tax advisor with any questions you have on these changes and how they may impact your business.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author

Sikich

Sikich is a global company specializing in technology-enabled professional services. With more than 1,900 employees, Sikich draws on a diverse portfolio of technology solutions to deliver transformative digital strategies and is comprised of one of the largest CPA firms in the United States. From corporations and not-for-profits to state and local governments and federal agencies, Sikich clients utilize a broad spectrum of services* and products to help them improve performance and achieve long-term, strategic goals. *Securities offered through Sikich Corporate Finance LLC, member FINRA/SIPC. Investment advisory services offered through Sikich Financial, an SEC Registered Investment Advisor. 