Insights: Article

Tax Reform: Impact on Expenses for Entertainment, Meals and Employee Transportation

February 09, 2018

The Tax Cuts and Jobs Act represents the most significant change in tax legislation since 1986. The act contains substantial changes that will affect the deductibility of entertainment, meals and transportation fringe benefit expenses beginning in 2018. However, until interpretative guidance is issued by the U.S. Treasury or the IRS, not all of the act’s provisions are entirely clear. In the information that follows, it has been noted where future guidance is anticipated.

What Has Changed?
Taxpayers have generally been permitted to deduct 50 percent of business-related entertainment and meals. In addition, employee meals provided by an employer for its convenience on its premises have been fully deductible. And, qualified transportation fringe benefits have been deductible in spite of being excluded from employees’ taxable income.

After 2017, the act eliminates deductions for entertainment, amusement or recreation expenses, membership dues for clubs and expenses for facilities related to these items. While meal expenses associated with operating a business—including meals during employee travel—remain deductible subject to the 50 percent limitation, the act extends the 50 percent deduction limit to employer-operated eating facilities through 2025. After 2025, expenses for employer-operated eating facilities become non-deductible. The act also disallows deductions for qualified transportation fringe benefits and certain expenses to provide commuting transportation for employees.

In light of these changes, many businesses are revising their bookkeeping procedures and general ledger accounts to capture expenses that will be treated differently in 2018 and subsequent years. Also, businesses may want to review and update their expense reimbursement policies. For instance, entertainment costs included by employers as taxable (W-2) wages reported to employees continue to be fully deductible.

Frequently Asked Questions
The following summarizes some of the questions we have received related to entertainment, meals and transportation fringe benefits provisions in the act. The answers provided represent our current thoughts and are general in nature—subject, of course, to change as additional U.S. Treasury and IRS guidance becomes available. Applicability to specific situations will vary depending on the particular facts and circumstances and should be determined through consultation with your tax adviser.

  • Cost of taking a customer or client golfing or to the theater or a ball game. The act generally denies a deduction for entertainment after 2017, so this cost will typically be non-deductible.
  • Cost of a package that includes a ticket to a charitable sporting event. This cost will be considered entertainment and non-deductible after 2017. (Note: Any charitable donation portion will continue to be deductible.)
  • Cost of dinner with a customer or client prior to, or after, entertainment. Depending on the facts, this cost may be non-deductible (as a part of the outing for entertainment). If there is a separate business purpose, clearly separate from the entertainment, for the dinner, and the meal cost is not lavish or extravagant, 50 percent of the meal cost should be deductible. Documentation of the business purpose of the meal is critical for deductibility. Further guidance anticipated.
  • Cost of snacks and refreshments purchased during a sporting event. Even though these items might be considered in the nature of meals, they are associated with the event entertainment and likely non-deductible. Further guidance anticipated. 
  • Cost of occasional holiday parties and picnics for all employees. The treatment of these costs is not affected by the act; the costs should continue to be fully deductible.
  • Cost of departmental gatherings and outings including refreshments. Depending on the circumstances, these costs may be fully deductible as long as the activities primarily benefit employees other than those who are highly compensated.
  • Cost of meals incurred by employees for business luncheons or while traveling on company business. As long as the expense is not lavish or extravagant, a deduction should be available but limited to 50 percent of the cost.
  • Cost of meals incurred by employees while attending a meeting of a service club (such as Rotary, Optimists, Kiwanis, etc.). As with business luncheons noted above, a deduction for the meal cost should be available subject to the 50 percent limitation. However, the cost of dues for membership in service clubs (and other business, social, pleasure or recreational clubs) appears to be non-deductible. But, expenses directly related to attendance at certain business leagues, such as the Chamber of Commerce and other similar organizations qualified under IRC Sec. 501(c)(6) should be deductible. Further guidance anticipated.
  • Cost of dinner and refreshments with a customer or client. As long as the expense is not lavish or extravagant, the deduction should be limited to 50 percent of the cost.
  • Cost of picnics or other events with food and beverages for customers. Depending on the circumstances and who is invited, these costs may meet an exception to the 50 percent limitation for items made available to the general public and be fully deductible.
  • Cost of incidental food, drinks and refreshments provided as hospitality items during an event to promote the sale of products or services where no entertainment is provided. Depending on the circumstances and who is invited, these costs may be fully deductible or subject to the 50 percent limitation. These type promotional events should also be reviewed for the potential to be considered as advertising. Also, particular care should be given to the invitation so that the incidental food and drinks are not “showcased” thus providing any potential to be considered as entertainment. Further guidance anticipated.
  • Cost of soft drinks, bottled water and other refreshments on hand for customers, clients and visitors to a business establishment. It seems possible that the cost of these items may qualify for the exception for items made available to the general public and be fully deductible. Further guidance anticipated.
  • Cost of refreshments, lunch or dinner brought to the office for employees working overtime. The act limits the deduction of these costs to 50 percent for years 2018 through 2025. After 2025, the costs will be non-deductible (barring a change in the law).
  • Cost of operating an eating facility on or near the business premises for employees. The act limits the deduction of these costs to 50 percent for years 2018 through 2025. After 2025, the costs will be non-deductible.
  • Cost of providing employees transit passes or parking. The act denies the employer a deduction for these costs after 2017. In addition, costs associated with providing transportation for an employee’s commute to work are generally non-deductible except as necessary to ensure the employee’s safety.

Review Your Situation
As noted above, your particular facts and circumstances and future IRS guidance may result in varying conclusions on the act’s treatment of these, and other, costs. Documentation, and correct characterization, are both still key components in deductibility. For assistance with applying the act provisions to your business or updating your accounting and documentation procedures to properly capture these costs, contact your Eide Bailly professional.

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