Under the 2017 Tax Cuts and Jobs Act, the provisions relating to meals and entertainment expenses were substantially altered to disallow entertainment expenses. There were also changes to the deductibility of meals provided to employees for the convenience of the employer, and for reimbursements of employee fringe benefits.
New rules are effective for years beginning after 12/31/2017.
Employee meals while traveling domestically and internationally
For amounts incurred or paid for tax years beginning after 12/31/2017, employee meals while traveling domestically and internationally are subject to the 50% limitation.
There is no change from prior tax law.
Client Entertainment
Client entertainment expenses (venue tickets, membership dues, golfing events, and more) under the 2017 Tax Cuts and Jobs Act are nondeductible for tax purposes.
Under the previous tax regime taxpayers were allowed a 50% deduction for entertainment expenses subject to various other limitations. The complete dis-allowance of entertainment expenses eliminates the subjective component when reviewing entertainment expenses meeting the “business purpose” requirement.
Note that meals and beverages at the entertainment event are still 50% deductible, and should be documented separately.
Client Meals
Client meals and beverages for business purposes are subject to the 50% limitation.
There is no change from prior tax law.
Employee Meals Provided for Convenience of Employer
The Tax Cuts and Jobs act expands the 50% limitation to meal and beverage expenses provided to employees on employer facilities. Barring further action by Congress, such meal and beverage expenses will be nondeductible for tax years beginning after Dec. 31, 2025.
Under prior law, these expenses were 100% deductible for tax purposes.
Company Sponsored Holiday Events
Expenses incurred for company holiday events continue to be 100% deductible as long as they fall under a specific exception under Section 274(e) for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.”
There is no change from prior tax law.
Fringe Benefits
Employee reimbursable fringe benefits such as the cost of employee parking and transit passes are no longer a business deduction to the employer. To be a deductible expense to the company under current tax law, the amount must be treated as taxable compensation to the employee.
Under prior law, a business could deduct these costs and there was no requirement to include the reimbursed expense as taxable compensation to the employee.
Employee achievement awards must be considered tangible personal property awarded to an employee. Awards provided in the form of cash, gift cards, coupons, and more (see charge below) are no longer deductible forms of employee awards unless the value of the award is included as part of taxable compensation to the employee.
Under prior law, a business could deduct these costs without including such amounts as taxable compensation to the employee, and the awards could consist of anything within a dollar limit of $400 per award and $1,600 for all awards to the employee for the year.
The dollar limit remains unchanged from prior tax law.
Recommendations
When employees file expense reports for reimbursement, requiring detailed documentation of travel, meal, and entertainment related expenses would assist in categorizing and maximizing the proper amount of fully or partially deductible expenses for tax purposes.
Separate general ledger accounts should be implemented and maintained to book meals, beverages, and entertainment expenses subject to different deductibility limitations.
Consider payroll gross-ups for taxable fringe benefits to employee to obtain the business deduction.
Incorporating the IRS per Diem rates for meals and travel expenses could assist with controlling employee expenditures while traveling domestically and abroad.
