To Spend or Not to Spend? Understanding the New Meals, Entertainment, and Transportation Rules
Since the enactment of the Tax Cuts and Jobs Act, people have been buzzing about changes to the meals, entertainment and transportation deductions. So, what’s all the noise, and how does this affect you?
Previously, entertainment expenses were 50% deductible so long as they were directly related to the conduct of an active trade or business. Under the new law, no deduction is allowed for entertainment expenses regardless of their relation to an active trade or business. However, don’t throw your arms up just yet – many internal entertainment expenses, otherwise known as “recreation” expenses, are still deductible. There is a distinction between “recreation” expenses and “entertainment” expenses, with recreation continuing to be 50% deductible for tax purposes.
Recreation is specifically defined as an activity which is primarily for the benefit of employees (IRC Section 274(e)(4)). The key factor here is that the event is hosted for an employee group, like an office location or for an entire company and not one or a few individual employees. Events benefitting just a few employees constitute entertainment and entertainment expenses are entirely non-deductible.
|Deductible Recreation Examples||Non-deductible Entertainment Examples|
There is an exception to this rule, which was maintained even under the new law: entertainment expenses that are reported in employees gross wages are fully deductible to the company.
Fortunately, the new law does not change the 50% deductibility of meals associated with a trade or business. But it does expand that 50% limitation to now include meals provided at the convenience of the employer or through an on-campus dining facility, both of which were previously fully deductible. Further, meals provided at the convenience of the employer or through an on-campus dining facility will become 100% non–deductible for tax years beginning after 2025.
Regarding both entertainment and meal expenses, the new laws are applicable to all such expenses paid or incurred after December 31, 2017. If you are a fiscal year taxpayer, it will be important to keep this in mind as you will likely have different rules applicable to your annual expenditures.
Before tax reform was enacted, employers were allowed to reimburse employees a specified amount for transportation, parking, and bicycling-related expenses without the reimbursement being taxable to the employee. At the same time, employers were afforded a deduction for these benefits. Under the new rules, and with the exception of transportation required for the safety of an employee, qualified transportation benefits (IRC Sec. 132(f)) including mass transit and parking, are no longer tax deductible by employers if they are also non-taxable to employees. Employers now have to choose not to take a deduction for these transportation fringe benefits or include the amount in the employees taxable compensation.
The changes create the need for improved recordkeeping and the possibility of setting up separate general ledger accounts to ensure accurate deductibility. Many companies may also consider reviewing internal policies for meals, entertainment and transportation benefits in light of the changes to deductibility.
If you have any questionshow this change will affect your company specifically, or for more information on other impacts, please feel free to contact us.