*NOTE: This Alert has been updated with new guidance that was provided by the IRS Oct. 3, 2018
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act. There are many changes under the new law that impact businesses. One in particular that business owners both large and small need to be aware of is new limitations on the deductibility of meals and entertainment expenses.
Prior to the passage of the Tax Cuts and Jobs Act (TCJA), you could deduct 50% of business- related meals and entertainment, and 100% of meals provided as a “fringe benefit” to employees by the employer. However, that all changed as of January 1, 2018.
Entertainment expenses, even if directly related to or associated with, substantial business discussions, can no longer be deducted. These expenses include tickets to take a client to a sporting or other event deductions for skyboxes and suites as well as meals during entertainment activities. Finally, payments for membership dues for any club organized for business, pleasure, recreation of other social purpose, have been eliminated as an expense for tax purposes.
While businesses will still be allowed to deduct 50% of meals while traveling or when discussing business with clients or prospects, the deductibility for certain meal expenses has been changed under TCJA. Meals provided through an in-house cafeteria or otherwise for the convenience of the employer as a fringe benefit will now be limited to a 50% deduction. As of 2026, this deduction too will be completely eliminated.
*New IRS Guidance on Meal Deductibility
In an attempt to better explain the how to apply the meal deduction, the IRS has issued transitional guidance based on input from taxpayers, and organization such as the AICPA. The press release announcing Notice 2018-76),states that “Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.”
The press release went on to say that “food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.”
The Department of the Treasury and the IRS expect to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment, sometime in the near future.
The following table summarizes the deductibility of meals under various scenarios (items marked in red denote changes resulting from the enactment of TCJA or clarified by the interim guidance):
|Meals without substantial business discussions||Nondeductible|
|Meals with clients/prospects during which business is conducted||50% deductible|
|Reimbursements for employees’ meal expenses while traveling on business||50% deductible|
|Meals at a sporting event or other entertainment activity
|Meals provided on the premises for the convenience of the employer (e.g., overtime meals)||50% deductible (until Jan. 1 2026)|
|Free meals to employees from an on-site dining facility||50% deductible (until Jan. 1 2026)|
|Holiday party or similar recreational/social activities primarily for the benefit of employees (including expenses for facilities)||100% deductible|
How MBAF Can Help
We can help your business plan for proper compliance with the new laws regarding deductibility of meals and expenses by helping you to set up your ledgers and record-keeping accordingly. With changes in the laws, it may not be so clear to business owners as to what meals and entertainment expenses qualify as 50% deductible, which are 100% deductible, and which are now non-deductible.
Compliance with and understanding the changes and implications of the Tax Cuts and Jobs Act can be very complex. If you would like to benefit from our expertise in these areas, or if you have further questions on this Advisory, do not hesitate to contact our Tax and Accounting Specialists, or call us at 1-800-239-1474