By Jordan Toone, CPA
Is your company ready for the changes related to the deductibility of meals and entertainment expenses? Effective for tax years beginning after December 31, 2017, the ‘Tax Cuts and Jobs Act’ (the Act) significantly changes the amount that will be allowed as a deduction for companies. It is important for companies to know of these changes so they can properly track and provide accurate information when preparing their 2018 tax returns.
In general, under the prior law, companies were allowed to deduct 50% of any meal expense if it was directly related to business activities. There were a few exceptions to the 50% limitation under the prior law. Specifically, expenses for de minimis fringe benefits, such as coffee and donuts or occasional working lunch meetings, and expenses related to a company-operated eating facility for their employees. For these exceptions, 100% of the expenses were deductible.
Under the Act, all meal expenses are subject to the 50% limitation, including expenses for de minimis fringe benefits and expenses related to operating a company owned eating facility. In addition to these changes, effective after December 31, 2025, companies will not be allowed any deduction for meal expenses incurred for in a company owned eating facility. It is also possible that the IRS may look to disallow operating expenses, beyond just the food and beverage costs, related to employer-operated eating facilities.
The more dramatic changes relate to entertainment expenses. Under the prior law, if companies incurred expenses for entertainment, amusement, or recreation; and if those expenses were directly related to their business operations, they were allowed a tax deduction of 50% of the total expense.
Under the Act, no deduction will be allowed for entertainment expenses incurred related to business activities. One complicating factor to consider is that many times expenses include both a meal component and entertainment component that may prove difficult and burdensome for companies to separate from each other. The IRS may seek to deny the deductibility for meals that have some form of non-deductible entertainment included if appropriate documentation is not provided. In those situations, it would be crucial to obtain documentation supporting the deductibility of the meal portion. The IRS does allow for the use of statistical sampling when identifying deductible and nondeductible expenses, as long as the guidelines set forth by the IRS are followed.
The Act significantly reduced the deductibility of expenses related to meals and entertainment. It also complicated the process of accounting for these types of expenses, and in certain situations, may require an increased amount of documentation to support these deductions. Companies need to consider the impact of these changes and create new general ledger accounts in order to track these expenses.
If you have questions about how these changes will affect your tax situation, contact the tax professionals at Larson & Company today.