Tax reform update on employee and business meals and entertainment

| News, Tax Briefs

By Dave Garrett, CPA, CGMA     As you’re likely aware, in late December 2017 Congress passed and the President signed the Tax Cuts and Jobs Act. The law will phase in a wide variety of changes to the way businesses calculate their tax liabilities — some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall in the latter category.

Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, the deduction for business-related entertainment, amusement, or recreation are disallowed completely.  Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be completely nondeductible.

There could be relief on the horizon

On April 2, 2018 the American Institute of Certified Public Accounts (AICPA) sent a request to the Department of the Treasury requesting immediate guidance regarding the disallowance of entertainment expenses. In its request, the AICPA, laid out a compelling argument that these expenses are primarily incurred for the purpose of furthering the taxpayers trade or business and not for social or personal reasons. The AICPA recommendations include that the Department of the Treasury:

  1. Clarify that under the recent tax reform, business meals with clients and prospects at restaurants are deductible, subject to the 50 percent cut.
  2. Clarify that under the reform, business meals with clients and prospects in a restaurant before, after, or during a sporting or entertainment event, whether inside or outside the venue, are deductible, subject to the 50 percent cut.

We have also learned that lawmakers did not intend to eliminate business meals with clients and prospects. We’re not exactly sure how lawmakers can undo what they’ve done to the tax code in this area but think it may take a technical correction to the tax code. Regardless, at the moment this appears to be really good news. We would like to see this resolved sooner rather than later but that’s not going to happen for some time, perhaps many months. Meanwhile, continue to track and document your meal and entertainment expenses as required. The requirements for business meal documentation are as follows:

  1. Name the person you had the meal with.
  2. The name of the restaurant where you had the meal.
  3. A short description of the business discussed during the meal.
  4. If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people, and an itemized list of what was purchased (a credit card statement is not sufficient).
  5. Separate business meal expenses with clients and prospects from employee meals.

We don’t know if the IRS will follow the AICPA recommendations for deducting business meals or if lawmakers will make the necessary technical corrections, but following the existing guidelines for documenting business meal expenses will ensure that if there is relief, your business meals will be deductible. For assistance sorting through all of these new rules, contact Alerding CPA Group at 317-569-4181 or www.alerdingcpagroup.com.

This post was written by:

David W. Garrett, CPA, CGMA
Director

As a Director at Alerding CPA Group, Dave oversees our tax practice while also providing tax advice, planning, support and compliance services for closely-held businesses and their owners. He has over 25 years of public accounting experience focusing primarily in serving closely-held companies with accounting, corporate structure, financing, taxation and operational issues.

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