The Tax Cuts and Jobs Act (TCJA) was signed into law by President Trump on December 22, 2017 and made sweeping changes to the Internal Revenue Code. Sacred deductions like the personal exemption were eliminated while tax rates were reduced, brackets were expanded, and new deductions like the 20% qualified business income deduction were introduced. Overall, the changes to the Code were a lot of give and take, but in the end, we anticipate that many of the changes will be pro-taxpayer. In this post we will examine a favorite expense line: business meals and entertainment.
First, a little background. Before the TCJA, meals and entertainment expenses were deductible if they were directly related to the active conduct of a business, were ordinary & necessary for the business and were properly substantiated. Furthermore, these expenses were generally limited to 50% deductibility. There were some exceptions to these general rules that allowed for 100% deductibility. Most notable among those exceptions were:
- meals provided to employees on the employer’s business premises for the convenience of the employer (de minimis fringe benefit)
- meals and entertainment expenses treated as reportable compensation to employees
- reimbursed expenses (expenses incurred by the taxpayer in connection with performing services for another taxpayer and those expenses were accounted for and reimbursed by the other taxpayer)
- recreational expenses primarily for the benefit of employees
- employee, stockholder, etc. business meetings
- meetings of business leagues
Under the old Code, business meals and entertainment expenses were generally grouped together in the same expense account and subject to the same rules and limitations.
Under the new Code, the TCJA distinguishes “entertainment” expenses from “business meals” and subjects the two distinct items to different sets of rules and limitations.
- Under the new law, “entertainment” expenses are completely nondeductible regardless as to whether the taxpayer establishes a directly related business purpose. This means that expenses for any activity which is of a type generally considered to constitute entertainment, amusement, or recreation is not deductible. For example, under the old law, if you purchased tickets to a Pelican’s game and took your customer for the purpose of discussing a business deal, the cost of the ticket could have qualified for a 50% deduction. Under the new law, the Pelican’s tickets are not deductible regardless as to how much business is transacted at the game.
- Under the new law, “business meal” expenses are still deductible and continue to be subjected to a 50% limitation. At this point, the Internal Revenue Code Regulations that define what constitutes a “business meal” have not been modified to reflect the new law. So, taxpayers are somewhat in the dark as to what constitutes a “business meal”. Furthermore, the new law adds the 50% limitation to de minimis fringe benefit meals (those meals provided for the convenience of the employer). Even more change is coming in this arena. Beginning in 2026 these de minims fringe benefit meals, will be 100% nondeductible.
As with most tax rules, there is generally an exception to the exception. Some forms of meals and entertainment expenses will continue to be 100% deductible. Those 100% deduction amounts include the items listed in 2 through 6 above.
As you have probably concluded by now, the tax simplification of this new tax law is not altogether simple. Don’t worry! As always, we are here to help you! We are taking our time to understand the nuances of the new tax law and developing strategies to help you take full advantage of its provisions. So, what do you need to be doing because of the tax law changes?
- Modify your chart of accounts to split your “business meals and entertainment” expenses into two separate categories: business meals (50% deduction) and entertainment (0% deduction).
- Continue to separately track your expenses for the items listed in 2-6 above (100% deduction).
- Call us to discuss any questions you may have and to strategize how you can benefit most from the law change.