Certified Public Accountants

Meals and Entertainment Expense Deduction Transformed

In late December, Congress passed the Tax Cuts and Jobs Act of 2017, which ushered in significant changes to the tax law impacting both businesses and individuals. The objective of the changes was to simplify the tax code for individual taxpayers and lower taxes on businesses to make them more competitive with other countries. The new law has significantly reduced tax rates on businesses to 21% and offers new incentives for owners of pass through entities such as the Qualified Business Income Deduction. While beneficial there were lesser known changes to other areas that companies need to accommodate. A key change that will impact all companies is the modification of the meals and expense deduction. Under past regulations, companies could expense a percentage of the total cost of qualifying meal and entertainment expenses, but that has changed. To help clients, prospects and others understand the change and its impact on their situation, Hanson & Co. has provided a summary of key details below.

Prior Deduction Rules

Under previous regulations, businesses were able to deduct up to 50% of the total cost of qualifying meal and entertainment expenses. More specifically, client entertainment activities including tickets to activities such as tickets to sporting events, private boxes, theatre tickets, golf club dues and golf outings for customers, were deductible at 50% while charitable events could be deducted at 100%. In addition, meals provided for employer convenience (such as a company cafeteria) and related fringe benefits were 100% deductible. Since the old tax regulations were intentionally broad, companies were able to deduct a wide variety of meal and entertainment expenses.

What’s Changed?

Since the beginning of the year, the majority of previously deducted entertainment expenses are no longer permitted. This means that sporting event tickets, golf outings and other activities used to entertain clients are no longer deductible. This also includes expenses from business meals such as those with clients, prospects, referral sources, vendors and potential employment candidates (to name a few). A key exception under the new tax law is any recreational or social activities for employees such as office holiday parties and other such events still qualify for the 100% deduction.

Meal expenses incurred by employees travelling on business and those provided for the convenience of the employer (employee cafeteria) may still qualify for the 50% deduction. The new tax has also changed the amount a company can deduct for fringe benefits such as office refreshments, client business meals and meal expenses incurred while attending seminars and conferences to 50% (reduced from 100% in prior years). It’s important to note that fringe benefits will no longer be deductible after 2025.

Other Changes

The Tax Cuts and Jobs Act also impacts the deductibility of other benefits offered by companies. Businesses are no longer permitted to deduct employee achievement awards in the form or cash, gift cards of gift certificates, meals, lodging or vacations. Employers are not able to deduct the cost of qualified transports and parking benefits and finally the employee exclusion for qualified bicycle commuting has been suspended through 2025. It’s important to note that the employee tax exclusion for employer provided dependent care, education support and adoption assistance are not impacted by the new tax law.

Contact Us

The new tax law has made many changes and will impact how companies record and document expenses for tax deduction purposes. Beyond this, the accounting treatment of many fringe benefits has also changed. If you have questions about the new meal and entertainment deduction rules or need assistance with your 2018 tax planning, Hanson & Co. can help. For additional information please call us at 303-388-1010 or click here to contact us. We look forward to speaking with you soon.