New Tax Rules for Meals and Entertainment

The recent “Tax Cuts and Jobs Act” (TCJA) changed the tax treatment of meals and entertainment (M&E) expenses, as well as some employee fringe benefits.  These changes will significantly impact you as a small business owner/employer.  It will require improved recordkeeping and the ability to differentiate between an entertainment expense and a deductible meal expense.  This blog will discuss prior tax laws and compare them to the new laws in an effort to assist you in identifying activities you may need to adjust in your normal business operations.

MEALS

Prior to 2018, taxpayers were allowed to deduct 50% of meals that were ordinary, necessary and directly related to the active conduct of trade or business.  Additionally, employers who provided meals in an employer-operated eating facility (i.e. cafeteria) to their employees, as well as other de minimis meals (i.e. snacks and overtime meals) were allowed a 100% deduction for these costs.

Effective January 1, 2018 through December 31, 2025, relative to employer provided meals and de minimis meals, TCJA only allows a 50% deduction for such costs versus the previous 100% deduction.  Additionally, there will be NO deduction allowed for such costs after December 31, 2025.

UPDATE FOR 2021 AND 2022 TAX RETURNS ONLY!!!

For these return periods only, business meals held at restaurants will be 100% deductible, not 50% deductible.  Record-keeping rules will still apply to protect your expense deduction.

BUSINESS ENTERTAINMENT

Prior law allowed the deduction for expenses related to meals, entertainment, amusement or recreational activities or facilities (including membership dues) if these expenses were directly related to the active conduct of the taxpayer’s trade or business.  These costs were 50% deductible as meals and entertainment expense.

Current law modified this rule by making all entertainment expenses, including facilities used for entertainment activities, NON-DEDUCTIBLE, even if they relate to, or are associated with, the conduct of business.  However, business meals and beverages remain 50% deductible.

In a nutshell, all forms of business entertainment, including fishing, sailing, golf outings, sporting events, hunting and associated expenses (i.e. license fees paid to sporting arenas, membership dues) are NON-DEDUCTIBLE.

 EXCEPTIONS TO THE 50% DEDUCTIBLE RULE

There are a few exception to the rule of only being able to deduct 50% of your business meal cost.  These exceptions allow a 100% deduction of business meals:

•  If the meals you furnished to an employee that is included in their W-2
• For recreational, social or similar activities held for employees
• To the extent it’s treated as income by a person other than an employee
• 50% rule does not apply to reimbursements to employees or other persons (reimbursement will be at full cost of the meal)
• Food made available to the general public (coffee and snacks offered to patrons while they wait for service)

In closing, the modifications made to the overall tax treatment of meals and entertainment expenses places additional recordkeeping responsibilities on the taxpayer to properly separate a business meal from an entertainment expense, if it is possible. If a meal is considered an entertainment expense, the meal will not be deductible.

Download our free “Meal, Entertainment, and Gift Worksheet” to easily identify circumstances where certain business activities and meal expenses will be considered deductible for 2018 through 2025 by clicking the button below: