The “Tax Cuts and Jobs Act of 2017” (the Act) made signiﬁcant changes to the business provisions that aﬀect a business’ ability to deduct meal and entertainment (M&E) expenses. The Act completely eliminated an employer’s ability to deduct entertainment expenses (even if those expenses were for business). The Act also signiﬁcantly limited an employer’s ability to deduct expenses associated with de minimis meals, including meals provided at an employer-operated eating facility or meals provided for the convenience of the employer.
Entertainment, recreation, social and similar expenses
Under prior law, deductions for expenses related to meals, entertainment, amusement or recreational activities, or facilities (including membership dues), unless such expenses were ordinary, necessary and directly related to the active conduct of the taxpayer’s trade or business were prohibited. If a taxpayer was able to demonstrate that such expenses were ordinary, necessary and directly related to its trade or business, the taxpayer could deduct up to 50% of such M&E expenses.
The following expenses were, and remain, 100% deductible:
- Amounts reported as compensation to an employee.
- Amounts includable in the gross income of a recipient who is not an employee.
- Certain reimbursed expenses, including reimbursement arrangements in which an employer reimburses the expenses incurred by a subcontractor’s employees.
- Items made available to the general public.
- Expenses for goods or services (including the use of facilities) that are sold by a taxpayer to customers in a bona ﬁde transaction for adequate and full consideration.
Additionally, these amounts were 50% deductible under prior law and remain 50% deductible under new law:
- Expenses for food and beverages provided primarily for the beneﬁt of employees furnished on the taxpayer’s business premises.
- Expenses incurred by a taxpayer directly related to business meetings of employees, shareholders and agents or directors.
The Act has made all entertainment expenses, including facilities used for such activities, nondeductible, even if these expenses directly relate to, or are associated with, the conduct of business. Business meals and beverages, however, remain 50% deductible.
Hence, all forms of business entertainment, including golf outings, ﬁshing, sailing, sporting events, hunting, theater tickets, license fees paid to sporting arenas, golf club dues, etc. are entirely nondeductible, even if a substantial and bona ﬁde business discussion is associated with the activity. Taxpayers may still deduct 50% of food or beverages incurred at such events, but only if they can prove that business was conducted.
Taxpayers should assess their current policies to determine if the changes under the Act will warrant a change in their business expense policy or if system changes are necessary. In many instances, taxpayers do not separately track food/beverage expenses and entertainment expenses. In addition, substantiation for such expenses does not always separately state how much of an expense relates to food/beverages and how much relates to entertainment.
Now that entertainment is nondeductible, taxpayers should also assess their current inventory of licensing agreements with entertainment venues, social clubs and other entertainment/recreation facilities.
The burden of proof is on a taxpayer to establish that a business meal is not an entertainment expense where the price is bundled.
These changes are eﬀective for amounts paid or incurred on or after January 1, 2018.