By: Alison S. Perrella
The Tax Cuts and Jobs Act of 2017 (TCJA) has made significant changes to the deductibility of meals, recreation and entertainment expenses for businesses beginning in 2018. Because of these changes, all businesses should change their record-keeping to segregate meals, recreation and entertainment expenses into the new categories of 0% deductible, 50% deductible and 100% deductible. Entertainment is now 0% deductible, and most meals are now 50% deductible.
Entertainment: Under the old law, a deduction was allowed for activities related to entertainment to the extent that business was conducted immediately preceding or following the entertainment event. The law changed to provide that for amounts paid or incurred after December 31, 2017, any expenditure with respect to an activity generally considered to constitute entertainment, amusement or recreation is not deductible, regardless of whether business is covered before, after or during the event.
Meals: Under the old law, most expenses for business meals were 50% deductible, except for certain qualified expenses which were 100% deductible, such as de minimis meals provided to employees for the convenience of the employer or on the employer’s premises. Under the new law, for amounts paid or incurred after 12/31/17, business meal expenses are now 50% deductible if there is no entertainment component. Meals associated with entertainment are 0% deductible.
Additional law provisions governing these issues are detailed below:
- Deductions for business meals are still allowed under code section 274(k) so long as the expense is not lavish and if the taxpayer or employee of the taxpayer is present at the furnishing of the meals. These meals are subject to a 50% disallowance under code section 274(n). Meals are not considered entertainment unless the meal occurs in connection with an event at an entertainment, amusement or recreation facility. If the meal occurs in that context it is non-deductible.
- 274(b) provides that no deduction is allowed under section 162 (or 212) for any expense for gifts made directly or indirectly to an individual to the extent that they exceed $25.
- 274(j) covers “employee achievement awards.” This provides that an item of tangible personal property (not cash, not vacations, not tickets to sporting or entertainment events) can be given to an employee for “length of service” achievements (for service greater than 5 years) or for safety achievements under a written company plan and when the award is part of a meaningful company presentation to the employee.
- 274(e)(1) and 274(n)(2)(A) provide that expenses for food and beverage furnished to employees on employer premises are deductible to the extent of 50% of the amount expended. Thus, coffee, water, food items are 50% deductible.
- 274(e)(4) provides that expenses for recreational, social or similar activities primarily for the benefit of employees (other than highly compensated employees) are allowed – they are not subject to disallowance under 274(a) and they are not subject to the 50% disallowance under 274(n)(2)(A). Thus, company outings, holiday parties, etc. are still 100% deductible.
With respect to payments to an entertainment facility that constitute a sponsorship as well as event tickets, the invoice for the sponsorship should break out the cost of the advertising versus the cost of tickets or meals. The value assigned to tickets or meals would not be deductible while the advertising piece is deductible. You should work with the facility to ensure that the invoicing breaks this out.
We encourage you to contact your trusted advisor at Wipfli/Howe, Riley & Howe to discuss these and other TCJA law changes.