Tax Reform Update On Business Meals And Entertainment

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The Tax Cuts and Jobs Act was signed into law in December. The law will phase in a wide variety of changes to the way businesses calculate their tax liabilities - some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall into the latter category.

Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50 percent of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer's business premises were 100 percent deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, the deduction for business-related entertainment, amusement, or recreation are disallowed completely.  Meal expenses incurred while traveling on business are still 50 percent deductible, but the 50 percent disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer's premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer's premises will be completely nondeductible.

There could be relief on the horizon

On April 2, 2018 the American Institute of Certified Public Accounts sent a request to the Department of the Treasury requesting immediate guidance regarding the disallowance of entertainment expenses. In its request, the AICPA, laid out a compelling argument that these expenses are primarily incurred for the purpose of furthering the taxpayers trade or business and not for social or personal reasons. The AICPA recommendations include that the Department of the Treasury:

  • Clarify that under the recent tax reform, business meals with clients and prospects at restaurants are deductible, subject to the 50 percent cut.
  • Clarify that under the reform, business meals with clients and prospects in a restaurant before, after, or during a sporting or entertainment event, whether inside or outside the venue, are deductible, subject to the 50 percent cut.

We have also learned that lawmakers did not intend to eliminate business meals with clients and prospects. We’re not exactly sure how lawmakers can undo what they’ve done to the tax code in this area but think it may take a technical correction to the tax code. Regardless, at the moment this appears to be really good news. We would like to see this resolved sooner rather than later but that’s not going to happen for some time, perhaps many months. Meanwhile, continue to track and document your meal and entertainment expenses as required. The requirements for business meal documentation are as follows:

  • Name the person you had the meal with.
  • The name of the restaurant where you had the meal.
  • A short description of the business discussed during the meal.
  • If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people, and an itemized list of what was purchased (a credit card statement is not sufficient).
  • Separate business meal expenses with clients and prospects from employee meals.

We don’t know if the IRS will follow the AICPA recommendations for deducting business meals or if lawmakers will make the necessary technical corrections, but following the existing guidelines for documenting business meal expenses will ensure that if there is relief, your business meals will be deductible.

Dave Garrett is a tax director for Alerding CPA Group.

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