Tax Reform Watch: What Is (and Isn't) Deductible Under the New Meals and Entertainment Expense Rules– February 08, 2018 by Laura White

UPDATE:  Read about guidance provided in Notice 2018-76 on meal expense deductibility in "Transitional IRS Guidance Creates Five-Part Test to Deduct Meal Expenses"

The deductibility of meal and entertainment expenses changed in some surprising ways with the passing of the Tax Cuts and Jobs Act (TCJA), which goes into effect for the 2018 tax year. How to interpret the law regarding these expenses, however, is not yet completely clear. As we wait for additional guidance from the IRS, below is our current understanding of the rules: 

  • Expenses incurred to entertain clients are no longer deductible, including meals associated with entertainment that are included with the price of the entertainment.
  • Meals provided to employees for the convenience of the employer, on the employer’s premises, are now only 50% deductible. 

Other provisions have remained the same: 

  • Business meals not included with the price of entertainment remain 50% deductible.
  • Payment for employee meals while out of town for a business purpose are still 50% deductible.
  • Employee parties remain 100% deductible. 

Below gives a quick snapshot comparison of the old versus new rules for expensing.

Type of Expense

Before TCJA

After TCJA

Entertainment (including meals that are included in the price of the entertainment)

 50% Deductible

Nondeductible

Business Meals (including meals during an entertinament event that are paid for separately)

50% Deductible

50% Deductible

Meals Provided for Convenience of Employer

100% Deductible

50% Deductible

Employee Parties

100% Deductible

100% Deductible

 

While the rules may seem straightforward, in reality there are many gray areas for businesses to navigate as they begin recording expenses this year under the new law. Below are some scenarios to help illustrate how to interpret the new meal and entertainment expense rules, based on our current understanding.

Deductible or Nondeductible?

Attending sporting, theatre, golf or other entertainment event with a client
Nondeductible as entertainment. These expenses are 100% nondeductible even if they are substantiated as having a business purpose. A dinner before or after the event would also be considered entertainment and therefore nondeductible.

Meals incurred while attending sporting, theatre, golf or other entertainment event with a client.
There are two scenarios:
Nondeductible as entertainment. These expenses are 100% nondeductible if the meal is included in the price of the entertainment. For example, if a client is taken to a basketball game in a company suite that includes access to food and drinks, and the price of the suite and game ticket includes the price of the food and drinks.

Deductible. If the meals are purchased separately from the entertainment, these expenses are deductible up to 50%. Substantiation requirements are the same as under the old law. For example, while at a baseball game hot dogs and drinks are purchased.

“Fun” events put on for clients/customers
Nondeductible as entertainment. These expenses are 100% nondeductible. For example, a happy hour or special event held at a museum for client/customers would fall under this category.
 
Giving sporting, theatre or other entertainment event tickets to a client
Deductible as a gift. These expenses are limited to $25 per person.
 
Selling sporting, theatre or other entertainment event tickets to a client
Deductible. The proceeds received from the sale of the tickets would reduce the cost of the tickets.
 
Giving sporting, theatre or other entertainment event tickets to an employee
Deductible as wages. These expenses must be recorded as wages to the employee and “grossed up” for payroll taxes. That means the gross amount of the employee’s wages must include the cost of the ticket plus the cost of the payroll taxes.
 
Business meal with a client or prospect
Deductible. These expenses are deductible up to 50%. Substantiation requirements are the same as under the old law.
 
Meal expenses paid for an employee while out of town on business or at an educational seminar
Deductible. These expenses are deductible up to 50%.
 
Meal expenses paid for employees for the employer’s convenience, on the employer’s premises
Deductible. These expenses are deductible up to 50%. An example of what falls under this category is when the company brings in dinner for employees so they can work overtime. Before the TCJA went into effect on January 1, 2018, these expenses were 100% deductible. Beginning January 1, 2026, these expenses will become 100% nondeductible.
 
Employee holiday parties/employee outings
Deductible. A “fun” outing plus a meal is still 100% deductible. For example, a holiday party or summer picnic continues to be fully deductible.
  
We anticipate additional guidance from the IRS on how meals will be treated for tax purposes. (See "Transitional IRS Guidance Creates Five-Part Test to Deduct Meal Expenses" for the updates provided in Notice 2018-76.) For now, it is a good practice to create separate general ledger accounts to separately record all of the items listed above. This will help ensure the proper tax deductibility treatment is given to each item. 
 
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.