February 25, 2020 | Blog
Proposed regulations released in response to tax reform changes to the meals and entertainment deduction answer questions posed by many, largely confirm what we thought, and shut down a few potential workarounds.
Not surprisingly, despite the multitude of changes brought about by the TCJA, tax pros and taxpayers alike were deeply concerned with…snacks. Can we still deduct our beloved breakroom coffee and donuts in full or are they too now subject to a limitation?! Alas, it would seem to be the latter.
But a sugar rush of workaround potentials would come about immediately following the law change. With no guidance yet on the matter, some were claiming the breakroom to be a recreational area for employees. Such treatment could potentially afford it full expensing protection via an exception to the limitations under IRC section 274(e)(4) which is allowed for recreation and social functions such as holiday parties and annual picnics for the benefit of employees.
Unfortunately, despite businesses upping the breakroom coolness factor with a ping pong table, it probably won’t get you there. One example in the regulations addresses this head-on stating, “the breakroom is not a recreational, social, or similar activity primarily for the benefit of the employees.” Maybe a party-foul, but this means the recreational exception won’t apply here just because employees may “incidentally socialize” where free food and drinks are available, leaving such items provided in the breakroom to be only half deductible.
Another food for thought was that de minimis items such as drinks and snacks don’t fall in the definition of meals, so they would not be subject to a 50-percent deduction. Who lives off of breakroom chips, donuts, and coffee during tax season anyway…(asking for a friend). But the notice would squash that as well by defining food and beverages as “all food and beverage items, regardless of whether characterized as meals, snacks, or other types of food and beverages, and regardless of whether the food and beverages are treated as de minimis fringes under section 132(e).” So even though the items are still not includable in employee income, they are considered meals for the purpose of determining deductibility.
Okay…well how about the fact that we provide the same snacks and drinks to everyone, including customers and visitors? Surely our employees can snag some treats too and it’ll meet the 100-percent exception for providing food to the general public! Maybe, but you better make sure over half of the food and beverages are actually consumed by said general public. If that’s not the case, then the portion employees consume are going to be subject to the 50-percent deduction limitation. The portion consumed by the general public (i.e. customers, clients, and visitors) here would still meet the exception under section 274(e)(7). How taxpayers track this will be interesting and potentially require further guidance.
Check out our handy chart to keep track of tax reform changes to meals and entertainment.
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