The recently enacted Tax Cuts and Jobs Act (“TCJA”) is a sweeping tax package. Here’s an overview of one specific important business tax change in the new law; Meals and Entertainment.
In general, the new TCJA provides for stricter limits on the deductibility of business meals and entertainment expenses for clients, and its employees. For amounts incurred or paid after January 1, 2018, the deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related; the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.
|2017 Expenses (Old Rules)||2018 Expenses (New Rules)|
|Office Holiday Parties||100% deductible||100% deductible|
|Entertaining Clients||50% deductible||No deduction for entertainment expenses|
|Event tickets, 50% deductible for face value of ticket|
|Tickets to qualified charitable events are 100% deductible|
|Employee Travel Meals||50% deductible||50% deductible|
|Meals Provided for Convenience|
|100% deductible provided they are excludable from employees’ gross income as de minimis fringe benefits; otherwise, 50% deductible||50% deductible|
(nondeductible after 2025)
It is still unclear how the Internal Revenue Service will interpret the definition of business meals (meals with clients or prospects) and if these will all be considered entertainment and be nondeductible, a business meeting and continue to be 50% deductible, or if there will be specific definitions to distinguish between the two.
Our recommendation is to be more diligent in the classification of meals and entertainment expenses for 2018 and beyond. Since some of these expenses will no longer have any tax impact, these expenses should be segregated into different accounts for tracking (deductible and nondeductible), along with a separate account for the business meals in which we are still waiting for clarification. Separating the expenses as they happen will help alleviate sorting through one general ‘Meals and Entertainment’ account at the end of the year to separate it into the different classifications.
If you have any questions or would like more details on how the new law may affect you, please do not hesitate to call.