The passage of H.R. 1, commonly known as the Tax Cuts and Jobs Act (TCJA), brought significant change to the tax deductibility of meals and entertainment expenses. The revised rules apply to expenses incurred after Dec. 31, 2017.
Financial services companies need to be aware of the new tax treatments for meals and entertainment expenses so they can adjust their internal accounting, properly track the costs, and correctly compute their tax accruals. Companies also might consider changing internal policies based on the deductibility of various expenses.
The General Rule for Entertainment Expenses
Previously, entertainment expenses were deductible subject to a 50 percent limitation. The TCJA generally eliminates the deduction completely. That prohibition includes expenses for an activity that is considered to constitute entertainment, amusement, or recreation; the cost of the facility used in connection with such activity; and expenses for food and beverage while attending the entertainment event.
A special rule under the TCJA treats dues or fees to any organization or club as a “facility” if those organizations or clubs are organized solely for entertainment purposes. Organizations such as the Kiwanis and Rotary clubs are not considered organizations solely organized for entertainment purposes and therefore dues paid to them remain 100 percent deductible.
Under the new rules, financial services companies that pay to participate in charitable sporting events like golf outings must closely track the costs. The costs related to a round of golf and meals no longer are deductible as an entertainment expense, and the remainder will continue to constitute a charitable contribution provided that the charity sponsoring the golf outing provides adequate substantiation. Companies that enter sponsorship arrangements, such as those involving naming rights for a venue, must break out the cost for associated benefits as entertainment expenses (for example, venue tickets and parking) and the remainder will constitute advertising expenses. In addition, companies that provide sporting event tickets for clients to use without a company employee in attendance should consider treating the expense as a gift to the client as companies are permitted to deduct $25 of gift expense annually per recipient.
The General Rules for Business Meals
The TCJA does not allow a deduction for the expense of food and beverages unless the expense is not considered lavish or extravagant within the circumstances and an employee of the company is present when the food or beverage is provided. Companies cannot claim a deduction when they make dinner reservations for clients and pick up the tab but do not actually attend the meal because, the reasoning goes, no business discussion can occur. The treatment of business meals with clients is somewhat unclear under the new law, but IRS guidance hopefully will confirm that these are still subject to the 50 percent disallowance.
Meals, drinks, and snacks provided on-site to employees for the convenience of the employer, such as lunches and dinners while working, also are subject to the 50 percent limitation until Dec. 31, 2025. Amounts paid or incurred after that date are 100 percent nondeductible. These expenses previously were 100 percent deductible. Firms that own dining facilities for employees, whether on-site or near the business premises, can deduct the cost of operating the facilities and expense of the food or beverage provided, subject to the 50 percent limitation until Dec. 31, 2025. After that time, such expense also will be 100 percent nondeductible.
Exceptions to the Rules
Meals and entertainment treated as compensation to an individual and subject to withholding taxes are fully deductible. If, for example, a company has season tickets for a local sports team, gives an employee tickets for a game, and includes the fair value of the tickets on her W-2 form, it can deduct the cost of those tickets in full. Similarly, if a company takes its staff out to dinner and includes the costs of their respective meals on their W-2s, it can deduct the expense.
In a perhaps more likely scenario, meal expenses included in the reimbursement of an employee’s moving expenses would be deductible as long as such moving expenses are reported on the reimbursed employee’s W-2.
Recreational expenses incurred for the benefit of employees, such as those related to a holiday party or company outing, continue to be fully deductible. The event, however, must be provided primarily for the benefit of employees who are not "highly compensated." In other words, outings for executives only do not qualify for the exception. Expenses related to business meetings that include employees, shareholders, agents, and boards of directors continue to be fully deductible, but the deduction of meal expenses at business meetings is limited to 50 percent.
Items made available to the public remain fully deductible, too. This includes candy or coffee provided in branch lobbies.
Finally, as laid out in a private letter ruling issued by the IRS, companies can deduct the expenses of meals and beverages provided as part of sponsored events. If a financial services company holds, for example, a seminar or charitable outing for which attendees pay a fixed price that entitles them to food or beverages, the company can deduct the expense of those items provided.
Proceed With Caution
The new restrictions under the TCJA for meal and entertainment expenses represent a significant departure from previous rules. Financial services companies should take the time now to adjust their expense reporting procedures to stay in compliance and maximize their deductions.