The Tax Cuts and Jobs Act (TCJA) enacted extensive changes to the deductibility of meals and entertainment (M&E) expenses for companies.
Prior to the new tax law, companies generally could deduct 50% of expenses for business-related M&E expenses. Further, employer-provided meals for employees on the employer’s premises and meals for the convenience of the employer were both 100% deductible.
With the enactment of the TCJA, entertainment expenses paid or incurred after December 31, 2017 are no longer deductible. Employer-provided meals and meals provided for the convenience of the employer are limited to a 50% deduction. This includes food and beverages provided to employees at the company facilities, such as an on-premises cafeteria. Expenses for recreational, social or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees, are still fully deductible.
To assist companies with these changes we have included the chart below which provides a summary of the changes made to the deductibility of the various types of M&E expenses.
| Type of Expense | General Deductibility Under Prior Tax Law | General Deductibility Under TCJA | Effective Date |
|---|---|---|---|
| Business Entertainment –Includes tickets to sporting events, shows, amusement or recreational activities incurred in connection with the company’s trade or business. |
50% deductible |
0% |
Expenses paid or incurred after December 31, 2017 |
| Recreational, Social or Similar Company Activity – Provided primarily for the benefit of employees (e.g., the company holiday party or summer picnic). |
100% deductible |
100% deductible |
No Change |
| Business Meals – Incurred or paid during the company’s ordinary trade or business activities (e.g., a sales employee’s meals while traveling for business). |
50% deductible |
50% deductible |
No Change |
| Meals for the Convenience of the Employer – Covers meals provided on or near business premises. |
100% deductible |
50% deductible |
Expenses paid or incurred after December 31, 2017 |
| Employer-Provided Meals at Employer’s Business Premises –Includes cafeteria facilities and other meals on-premises at the company. |
100% deductible |
50% deductible |
Expenses paid or incurred after December 31, 2017 (will be non-deductible beginning after December 31, 2025) |
In 2018, companies should review the tax treatment of their M&E expenses to identify expenses that should be fully deductible, subject to the 50% limitation or not deductible. Companies should update their general ledger M&E expense accounts for these changes. Many companies include all M&E expenses in one general ledger expense account. We recommend that you create separate accounts. As an example, a company could have three M&E expense accounts set up as Entertainment, Business Meals and Internal Company Events. This will avoid going through invoices and accounts to identify the different “buckets” for deductibility purposes at the end of the year.
We are waiting for further guidance from the IRS on the new tax law to provide more clarity on these changes and related tax planning.
For more information, contact your ORBA advisor at 312.670.7444.
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