Tax reform modifications to deductions for business meals and entertainment

The recently enacted Tax Cuts and Jobs Act (TCJA) made changes to the tax deductibility of certain meals and entertainment expenses. Not only might these changes affect a company's decision to purchase such goods or services, but they also may require a change in the overall accounting and tracking of such expenditures.

Business entertainment

Previously, the deduction for otherwise allowable entertainment expenses was limited to 50 percent. The TCJA eliminated this 50 percent deduction for amounts paid or incurred after December 31, 2017 with certain exceptions.

Meals provided to employees

The TCJA made certain changes to the tax treatment of food or beverages provided to employees.

For employees: The TCJA didn't change tax treatment of food or beverages provided by an employer. The value of food or beverages provided is excluded from an employee's income if it fits into one of these categories:

1. Meals provided as a de minimis fringe benefit. This includes any property or service of which the value (after taking into account the frequency with which similar fringes are provided by the employer to its employees) is so small as to make the accounting for it unreasonable and administratively impractical, e.g., coffee, doughnuts
2. Meals provided at an on-premises, employer-operated eating facility that are considered a de minimis fringe benefit, e.g., a cafeteria
3. Meals provided to employees for the convenience of the employer at the employer's business location, e.g., a meal provided to an employee over lunch so she is there to take an emergency call

For employers: The deduction for amounts paid or incurred for otherwise allowable food or beverage expenditures is generally limited to 50 percent. Certain exceptions to this general rule allow an employer to take a full deduction for such food and beverage costs. The TCJA didn't change many of these exceptions; however, changes were made to the deduction for food or beverages excluded from an employee's income as discussed above.

Prior to the TCJA, the deduction for expenses satisfying the requirements of the first or second categories above wasn't limited, while the deduction for amounts falling in the third category were generally limited to 50 percent. Now, amounts paid or incurred in the first two categories above are 50 percent deductible.

Further, the TCJA provides that amounts paid or incurred after December 31, 2025, that fall into the second and third categories above are no longer deductible.

Other meals

The 50 percent deduction remains for meals with clients provided business was conducted and such expense wasn't lavish, extravagant or considered entertainment, amusement or recreation. In addition, no change was made to the 50 percent deduction for meal costs during business travel.

Best practices for reporting

For meals and entertainment expenditures, consider creating or updating procedures to separately account for the following categories:

50 percent deductible meals

1. Furnished on the business premises of the taxpayer primarily for its employees
2. Directly related to business meetings for employees, stockholders, agents or directors
3. Directly related to attendance of a business meeting or convention of a tax-exempt organization under IRC §501(c)(6) and §501(a)
4. Client business meals not considered entertainment, amusement or recreation
5. Business meals during travel

100 percent deductible meals

1. Included in an employee's compensation
2. Reimbursed by another party
3. Provided for recreational, social or similar activities (including facilities), primarily for the benefit of employees (other than employees who are considered highly compensated)
4. Provided to the general public
5. Meals sold to customers
6. Includible in income of persons who aren't employees

100 percent deductible entertainment

1. Included in an employee's compensation
2. Reimbursed by another party
3. Provided for recreational, social or similar activities (including facilities), primarily for the benefit of employees (other than employees who are considered highly compensated)
4. Provided to the general public
5. Entertainment, amusement and recreation expenses directly related to business meetings for employees, stockholders, agents or directors
6. Entertainment, amusement and recreation expenses directly related and necessary to attendance at a business meeting or convention of any organization described in IRC §501(c)(6) and exempt from taxation under IRC §501(a)
7. Entertainment sold to customers
8. Includible in income of persons who aren't employees

Nondeductible entertainment: All entertainment, amusement and recreation expenses not meeting one of the above categories. Such nondeductible expenses may include entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events and on hunting, fishing, vacation and similar trips. It's unclear at this point, absent IRS guidance, whether business meals with clients at such entertainment events will be 50 percent deductible.

Katie Andrews is manager at BKD. Kori Zey, manager, and Robb Conner, director, also contributed to this column.