For many years, businesses have taken advantage of numerous tax-savings
opportunities to deduct popular employer-provided fringe benefits, such as work-related activities—including certain meal and entertainment expenses. In Part III of our Learning Series, we examine the major changes you need to be aware of now.
Prior to the Tax Cuts and Job Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer, on the employer’s business premises, were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the employee (see summary chart below).
Also prior to Tax Reform, no deduction was allowed for ordinary and necessary expenses for an activity generally considered to be entertainment, amusement, or recreation, or for a facility used in connection with such an activity, unless the taxpayer established that the expense was directly related to or associated with the active conduct of the taxpayer's trade or business or income-producing activity. The deduction couldn't exceed the portion of the item that met the "directly related to or associated with" standard. However, the restrictions on deducting entertainment expenses did not apply to nine types of expenses that are listed in Code Sec. 274(e), including the following:
expenses for goods, services, and facilities that are treated as compensation to an employee on the employer's income tax return and as wages of the employee for withholding purposes.
expenses paid or incurred by the taxpayer, in connection with the performance of services for another person, under a reimbursement or other expense allowance arrangement, if the taxpayer accounts for the expenses to that person.
expenses for recreational, social, or similar activities (including related facilities) primarily for the benefit of the taxpayer's employees, other than highly-compensated employees.
That Golf Outing?? No Longer a Deductible Business Expense
Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible.
Also under the new law, no deduction is allowed for (1) an activity generally considered to be entertainment, amusement, or recreation, (2) membership dues for any club organized for business, pleasure, recreation, or other social purposes, or (3) a facility used in connection with any of the above items.
Entertainment expenses are completely nondeductible, regardless of whether they are directly related to or associated with the taxpayer's business, unless one of the exceptions in Code Sec. 274(e) applies (Note: Code Sec. 274(e) was not affected by the Tax Cuts and Jobs Act.)
To summarize, there are five major changes to note with Meals & Entertainment, and other fringe benefits, which are all effective for amounts incurred or paid after December 31, 2017:
(1) Deductions for business-related entertainment expenses are disallowed.
(2) The 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer.
(3) Deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained (except in the case of qualified bicycle commuting reimbursements).
(4) No deduction is allowed for transportation expenses that are the equivalent of commuting for employees (e.g., between the employee's home and the workplace), except as provided for the safety of the employee. However, this bar on deducting transportation expenses doesn't apply to any qualified bicycle commuting reimbursement, for amounts paid or incurred after Dec. 31, 2017, and before Jan. 1, 2026.
(5) For purposes of the employee achievement award rules, “tangible personal property” does not include cash, cash equivalents, gifts cards, gift coupons, gift certificates (other than where the employer pre-selected or pre-approved a limited selection) vacations, meals, lodging, tickets for theatre or sporting events, stock, bonds or similar items, and other non-tangible personal property. (Code Sec. 274)
Now more than ever, employers need to understand their M&E expenses, and how other fringe benefits provided to employees are treated, and ensure they are properly categorized and deducted to avoid lost tax savings. If you would like to discuss how these changes affect your particular situation, and any strategic planning moves you should consider, please give us a call at 401-273-7600.