Authored by Paul Dillon and Patrick Balthazor
The legislation informally known as the Tax Cuts and Jobs Act (TCJA or the Act) makes significant changes to deductibility rules for meals, entertainment and other benefit-related expenses of businesses. The following continues our series updating you on the changes brought about by the TCJA.
The TCJA repeals the provision that allowed for a deduction for entertainment, amusement or recreation expenses directly related to or associated with a taxpayer’s trade or business. This includes items such as membership dues for any club organized for business, pleasure recreation or social purposes as well as for any facility used in connection with these items.
Basically, all entertainment expenses are nondeductible, unless they meet one of the exceptions under Internal Revenue Code section 274(e), which was not changed by the TCJA. That section doesn’t impose restrictions on nine types of expenses, including:
- Expenses for food and beverages (and facilities used in connection therewith) furnished on the taxpayer’s business premises primarily for his employees. However, see discussion changing the meal expense to a 50 percent item below.
- Expenses for goods, services or facilities treated as compensation to an employee and are considered wages for withholding purposes.
- Expenses paid or incurred by a taxpayer in connection with the performance of services for another person under a reimbursement or other expense allowance arrangement, if the taxpayer accounts for the expenses to that person.
- Expenses for recreational, social or similar activities (including related facilities) primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.
- Expenses of a taxpayer directly related to business meetings of his employees, stockholders, agents or directors.
Company activities, such as office holiday parties, should remain fully deductible under these exceptions. This applies to both meals and entertainment.
The Act generally would retain the 50 percent deduction for food and beverage expenses associated with a trade or business, effective for amounts paid or incurred after Dec. 31, 2017. However, additional limitations would also be imposed on meals previously eligible for a full deduction.
The Act will apply the 50 percent limitation to certain meals provided by an employer that were previously 100 percent deductible. The expanded use of the 50 percent limit would apply to food and beverages provided to employees as de minimis fringe benefits; for meals provided at an eating facility that meets the requirements for an on-premises dining facility; and to meals provided on premises to employees for the convenience of the employer.
The 50 percent deduction limit applies for years after 2017 and before 2026. The de minimis meals, on-premises meals and meals for the convenience of the employer expenses would be nondeductible after 2025.
Other benefit-related provision changes
- Employers may not deduct employee achievement rewards in the form of cash, cash equivalents, gift cards, gift coupons or gift certificates (other than in arrangements offering a preselected limited array of such items), meals, vacations, lodging, theater or sporting event tickets, stocks, bonds or other securities after 2017.
- Employers may no longer deduct amounts related to qualified transportation and parking benefits after 2017. The Act also suspends the employee exclusion for qualified bicycle commuting benefits for 2018 through 2025.
- The Act suspends the deduction and exclusion for moving expenses for 2018 through 2025 (with an exception for members of the U.S. armed forces).
- Employers that offer paid family and medical leave programs that meet specified conditions are eligible for a temporary tax credit starting in 2018.
Provisions to eliminate the employee tax exclusion for employer-provided dependent care, educational assistance and adoption assistance benefits were dropped.
Please visit our tax reform resource center for additional information.
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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.