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.
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:
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.
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.
For meals and entertainment expenditures, consider creating or updating procedures to separately account for the following categories:
50 percent deductible meals
100 percent deductible meals
100 percent deductible entertainment
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.