New Tax Reform Law Regarding Deductions
THE NEW TAX REFORM LAW TAKES A BITE OUT OF MEALS, ENTERTAINMENT, AND TRANSPORTATION DEDUCTIONS
By Jay M. Rubinstein
The Tax Cuts and Jobs Act, (TCJA), although being pro-business in many respects, limits the deductibility of meals, entertainment, and transportation expenses. In the past, taxpayers could deduct 50% of expenses for business related meals and entertainment. But under the new law, many clients are asking questions regarding these new limitations. We have simplified the changes so you and your business can have a quick guide to understanding the new law and how these deductions can help you manage the cost and deductibility of these expenses.
CUSTOMER ENTERTAINMENT…
Prior to 2018, the entertainment strategy of a business was to give the customer/prospect a good time and 50% of the cost of event tickets or other entertainment could be deducted. A charitable event cost was 100% deductible. But no longer; the TCJA has repealed the deduction for all client/prospect related entertainment or amusement activities. No more deductions for sporting events, nightclubs, or sunset boat rides.
But there is good news for deducting one aspect of customer/prospect entertainment: the reasonable cost of a business related meal is still 50% deductible. I recommend that the meal be in a food venue such as a restaurant. Meal or food expenses that are incurred at a club or event will likely be disallowed by the IRS as being an entertainment expense, which is no longer deductible, rather than a “meal” expense which is still 50% deductible.
TAKING CARE OF BUSINESS-EMPLOYEE MEALS…
Meals provided for the employer’s convenience remain 50% deductible through 2025. In 2026 they become nondeductible. This 50% deduction applies to all snacks, beverages, and other food items. Office parties when everyone is invited remains 100% deductible. It seems the cost of a party for a group of employees is also still deductible at 100%. This would be when an entire department has a party for achieving a goal for example, but the cost of a meal brought in for just managers only would be deductible at only 50% since everyone in the group was not participating. All employee meal expenses while traveling remain 50% deductible.
EMPLOYEE TRANSPORTATION PERKS…
Employee transportation benefits for parking, transit passes, and bike commuting were deductible. These expenses are no longer deductible for travel between the employee’s home and workplace, with two exceptions: transportation considered necessary for the employee’s safety and for bike commuters who can be reimbursed up to $20 per month. Note that if your business still reimburses transportation costs, employees can still exclude these benefits from income.
THE AWARD FOR THE EMPLOYEE OF THE MONTH GOES TO… Previously employee awards of up to $400 per award or $1,600 per year were fully deductible and not taxable to the employee. Under TCJA, the dollar limits remain the same and the employee does not have to declare the award, but cash, gift cards, certificates, vouchers, stocks/bonds, lodging, and coupons are not deductible by the employer. To be deductible the award must be tangible goods.
Here is a quick reference recap of the new law as it relates to meals and entertainment:
EXPENSE / DEDUCTIBLE
Entertainment expenses at an event, club, or social venue / NO
Meals with customers/prospects involving business topics at a restaurant / 50%
On premise meals, snacks, or beverages for convenience of employer / 50%
Meals for traveling employees / 50%
Company social events such as a holiday party or summer BBQ / 100%
Jay M. Rubinstein, J.D., M.B.A., is a senior tax manager at LLG with 30+ years experience in federal and state taxation. If you have any questions, please contact him at 847-205-5420 or [email protected].