Meal and entertainment (M&E) expense, a common business expense, has been affected by the new Tax Cuts and Jobs Act (TCJA). Before TCJA, M&E expenses were generally allowed if the taxpayer could establish that the expenses were “directly related to” or “associated with” the active conduct of a trade or business, and were limited to a 50% deduction.
Under TCJA, for amounts paid or incurred after Dec. 31, expenses generally considered to be for entertainment, amusement or recreation will no longer be deductible. Entertainment expenses that are no longer deductible include, but are not limited to: the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.
Pre-TCJA a meal expense was not deductible unless (a) the expense is not lavish and extravagant under the circumstances, and (b) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages.
Is a “Business Meal” Deductible under the TCJA?
While the TCJA abolished the “directly related to” or “associated with” language that used to apply to business meals and entertainment (which doesn’t help with clarification), it is the position of the American Institute of Certified Public Accountants (AICPA) that business meals that (1) take place between a business owner or employee and a current or prospective client; (2) are not lavish or extravagant under the circumstances; and (3) where the taxpayer has a reasonable expectation of deriving income or other specific trade or business benefit from the encounter, are not disallowed under Code Sec. 274(k). So it appears that for now, the 50% deduction for meals remains intact.
Employee Meals on Company Premises
Pre-TCJA, expenses for food and beverages (and the facilities serving them) furnished on the business premises of the taxpayer were not subject to the 50% deduction limit if they were excludable from the recipient’s income as a de-minimis fringe benefit where:
- Supper (or supper money) is provided occasionally so that the employee can work overtime.
- An employer-operated eating facility is located on or near the employer’s business premises, and its revenue normally equals or exceeds its direct operating costs.
Under TCJA, employee meals on company premises are subject to two sets of rules:
- Such meals, as described above, are not exempt from the 50% limit on deduction for meals for amounts paid or incurred from 2018-2025.
- For amounts paid or incurred after 2025, no deduction will be allowed for: any expense for the operation of an employer-operated eating facility; any expense for food or beverages associated with an employer-operated eating facility; or any expense for meals provided on the employer’s premises.
Other Exempted Expense
A number of expenses were exempt from the 50% deduction phase-out under pre-TCJA law and will continue to be exempt from these restrictions as revised by the TCJA law.
They are as follows:
- Recreational, etc., expenses for employees: Christmas party, annual picnic, summer outing, use of swimming pool, baseball diamond, bowling alley, golf course, etc. However, these recreational and social expenses must be made primarily for the benefit of employees other than highly compensated employees.
- Items made available to the public: expenses for goods, service, and facilities.
- Entertainment sold to customers
- Expenses includible in income of persons who are not employees: For example, independent contractors or a director who is not an employee, who receives a benefit for entertainment. It covers expenses for goods, services, or facilities provided to a person who isn’t employed by the taxpayer, but is nevertheless taxed on the value of the entertainment, amusement or recreation as compensation for services.
Two other categories of expenses that are not exempt from the 50% deduction limit are as follows:
- Employee, stockholder, etc., business meetings: Expenses incurred by a taxpayer which are directly related to business meetings of his or her employees, stockholders, agents, or directors. Those expenses for meetings that are primarily social or nonbusiness purposes would not be exempt from the 50% rule and would be nondeductible.
- Meetings of business leagues, etc.: This exemption covers expenses for entertainment directly related to and necessary to attendance at business meetings or conventions of any organizations such as business leagues, chambers of commerce, real estate boards and boards of trade during the actual meeting.
If you have any specific questions on this topic, or would like to discuss any other issues, please contact us at Bowman & Company, LLP (209) 473-1040.