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 |
spacing
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
- 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:
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.
