The Tax Cuts and Jobs Act of 2017 has made significant changes to the deductibility of meals, entertainment, and commuting benefits. These changes can be confusing and difficult to understand. It is important to consult your Alloy Advisor so that they can help you navigate the changes as they are applied to your specific circumstances. In the meantime, below is some general guidance on the new tax law changes.
Chart comparing existing meals and entertainment allowances with the deduction changes under the new tax law as of 2018.
Prior to the tax reform, employers were able to provide transit passes, parking, carpooling, and bicycle commuting benefits to employees and take a tax deduction. Under the new law, employers can no longer take a deduction for providing any transportation or financial assistance for an employee’s commute to work for anything paid or incurred after December 31, 2017 unless it is for bicycle commuting. There is also potential exception if the fringe benefit was for the safety of the employee the employer may be able to continue to take a deduction. It is important to note that the qualified bicycle commuting benefits need to be included in the employee’s income for tax years beginning after 2017 and before 2026.
Sporting events, concerts, golf outings, boat trips, and other events have always been a popular way for businesses to get a tax deduction while entertaining customers and prospects. Under the new law, these are no longer deductible. For many businesses owners, this will require them to rethink and retool the sales process. Some entertainment-related rules do not change, such as expenses for recreational or social activities and related facilities primarily for benefit of non-highly compensated employees (holiday parties).
While the entertainment portion is not deductible, business meals can still be deducted. It is important to substantiate the business aspect of the meal to ensure deductibility. Employee travel meals remain 50% deductible. Employer provided meals for the convenience of the employer in prior years was fully deductible. Under the tax reform, employers may only deduct up to 50% of these meals. This would include expenses for food, beverages, and related facilities that are provided to employees on premises, such as a company cafeteria or kitchen.
To help minimize the impact from the new law, it can be helpful to update your general ledger to have separate accounts for business meals and entertainment. Historically, many businesses have combined their meals and entertainment into one account. This was not an issue as both were subject to the 50% deductible rule. Under the new law, by separating your entertainment (non-deductible) and meals (50% deductible) expenses, you potentially could maximize tax deductions and save time on tax preparation.
| Old Rules for Expenses | New Rules for Expenses | |
|---|---|---|
| Office Holiday Parties | 100% Deductible | 100% Deductible |
| Entertaining Clients | ||
| Client Meals | 50% Deductible | 50% Deductible |
| Events | 50% Deductible | Non-Deductible |
| Golf and Outings | 50% Deductible | Non-Deductible |
| Employee Travel Meals | 50% Deductible | 50% Deductible |
| Meals Provided for Convenience of Employer |
100% Deductible as de minimis fringe benefits |
50% Deductible non-deductible after 2025 |
If you have questions about the tax reform changes and new rules for deductions, please reach out to your Alloy Advisor so they can assist you in determining expense deductibility.
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Manager & Director of Cloud Services
Chris provides accounting, tax planning, and consulting services to professional athletes, family entertainment centers, and other businesses in the amusement and hospitality industry. He also aids clients in implementing cloud accounting solutions.
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