There’s been an abundance of information being discussed on how the new tax laws will impact businesses. Early discussions focused primarily on top-level issues like tax rates and key deductions and credits, but more detailed information has now become available since its passing. One of the smaller provisions that did not get too much media attention several months ago is the reduction and eventual elimination of the meals and entertainment deduction.
Meals & Entertainment 2017
For the tax year ending December 31, 2017 expenses related to meals and entertainment are 50% deductible. These include any meals and entertainment expenses incurred while:
- Traveling away from home (whether eating alone or with others) on business.
- Entertaining customers at your place of business, a restaurant, or other location.
- Attending a business convention or reception, business meeting, or business luncheon at a club.
However, there are meals that are 100% deductible. These are meals that are provided to employees for the convenience of the employer. For example, an employer will have a cafeteria in-house to cut down on employee lunch breaks. These meals are typically in-house, during regular work hours, and is for the benefit of the employer.
Meals & Entertainment 2018
With the passage of the new tax law, meal and entertainment expenses as we know it will be eliminated. Businesses will no longer be able to deduct entertainment expenses subject to the 50% limitation. Furthermore, working meals for employees will be subject to a new 50% limitations.
What does this all mean? Essentially, those business meetings with current or potential clients will no longer be deductible. Taking a client out to lunch or going out to dinner to entertain potential clients will be non-deductible expenses. This could be a huge setback for businesses that heavily rely on meals and entertainment as a way to drive new business or as a means to boost employee morale.
Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after December 31, 2017 and until December 31, 2025, the provision expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after December 31, 2025 are not deductible.
Business owners will have to be more diligent in the classification of meals and entertainment expenses for 2018 and beyond. Since some of these expenses will no longer have any tax impact, business owners should segregate these expenses into deductible and non-deductible accounts.
Having a preference for deductible meals will be beneficial going forward, specifically, meals provided to employees for the benefit of the employer. These meals should be non-discriminatory and should be available to all employees. Travel meals will generally be deductible as well so properly segregating those expenses will be critical.
On another note, business owners may deduct 100% of meals if they are classified as advertising. These would be for events that benefit the entire community or have a charitable cause. For example, an insurance agent can have an event open to the public that benefits the community as a whole. Meals purchased for these events may be considered a form of advertising and therefore are 100% deductible.