The Tax Cuts and Jobs Act (TCJA) makes major changes to one of the more common business expenses—outlays for meal and entertainment. As this two-part alert explains, many, but not all, entertainment expenses are no longer deductible after 2017. A number of meal expenses also escape the crackdown. The following discussion covers the deduction rules for employee meals on company premises and the types of expenses that are exempt from the various statutory restrictions on meals and entertainment.
Employee Meals on Company Premises
Under pre-TCJA law, expenses for food and beverages (and the facilities for serving them) furnished on the business premises of the taxpayer primarily for his or her employees were exempted from the former rule limiting entertainment type expenses to those “directly related to” or “associated with” a trade or business. Additionally, under pre-TCJA law, meals were not subject to the 50% deduction limit if they were excludable from the recipient’s income as a de minimis fringe benefit. However, such meals were subject to additional restrictions on business meals.
In general, meals are excludable from the recipient’s income as a de minimis fringe where:
- Supper (or supper money) is provided occasionally so that the employee can work overtime.
- An employer-operated eating facility is located on or near the employer’s business premises, and its revenue normally equals or exceeds its direct operating costs.
An employee may exclude from gross income the value of meals furnished on the employer’s business premises, for the convenience of the employer, to the employee, the employee’s spouse, and any of the employee’s dependent children. An employee entitled to this exclusion is treated as having paid an amount for the meal equal to the facility’s direct operating costs attributable to the meal. This makes those meals excludable as a de minimis fringe. Thus, under pre-TCJA law, employers could fully deduct the cost of business meals that were excludable from the income of employees because they were provided at an employer-operated eating facility for the convenience of the employer.
Under the TCJA, employee meals on company premises, defined the same way as under pre-TCJA law (see above), are subject to two sets of rules:
- For amounts paid or incurred after 2017 and before 2026, these meals are exempt from the general disallowance of deductions for entertainment, and for facilities associated with entertainment. However, as the TCJA repealed the former exemption for de minimis fringe benefits, such meals are not exempt from the 50% limit on deductions for meals.
- For amounts paid or incurred after 2025, no deduction will be allowed for: any expense for the operation of an employer-operated eating facility described; any expense for food or beverages associated with an employer-operated eating facility; or any expense for meals described in Code Sec. 119(a).
Other Exempted Expense
A number of expenses were exempt from key restrictions under pre-TCJA law and continue to be exempt from these restrictions as revised by the TCJA law. These restrictions are: the former rule limiting entertainment type expenses to those “directly related to” or “associated with” a trade or business, and the current rule barring deductions for entertainment, amusement or recreation; plus the former rule placing a 50% deduction limit on meals and entertainment, and the current rule placing a 50% deduction limit on meals.
Additionally, the expenses that are exempt from the above restrictions also are exempt from the extra restrictions on business meals (can’t be lavish or extravagant, taxpayer or his or her agent must be present), which are unchanged by the TCJA.
These exempted expenses are as follows:
- Recreational, etc., expenses for employees. This exemption covers expenses by a taxpayer for a recreational, social, or similar activity primarily for the benefit of his or her employees (such as a Christmas party, annual picnic, or summer outing). This rule also applies to an expense for use of a facility (such as a swimming pool, baseball diamond, bowling alley, or golf course) in connection with a recreational, social or similar activity. However, these recreational and social expenses must be made primarily for the benefit of employees other than highly compensated employees. One category of highly compensated employee is “5% owner”. For purposes of this provision, an individual owning less than a 10% interest in the taxpayer’s trade or business isn’t considered a shareholder or other owner, and an individual is treated as owning any interest owned by a member of his or her family.
- Items made available to the public. This covers expenses for goods, service, and facilities made available by the taxpayer to the general public.
- Entertainment sold to customers. This exemption covers expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth. Thus, the cost of producing night club entertainment (such as salaries paid to employees of night clubs and amounts paid to performers) for sale to customers or the cost of operating a pleasure cruise ship as a business will come within this exception.
- Expenses includible in income of persons who are not employees. This exemption coves expenses for goods, services, or facilities provided to a person who isn’t employed by the taxpayer, but is nevertheless taxed on the value of the entertainment, amusement or recreation as compensation for services. This exemption applies, for example, to entertainment provided to a director who is not an employee or someone working for the taxpayer as an independent contractor. To benefit from the exemption, the payor must report the item on an information return, even if its value is below $600 (the usual Form 1099 minimum).
Two other categories of expenses are exempt only from the former rule limiting entertainment type expenses to those “directly related to” or “associated with” a trade or business, and the current rule barring deductions for entertainment, amusement or recreation. These two categories of expenses are not exempt from the 50% deduction limit in former and current limits on business meals (can’t be lavish or extravagant, and the taxpayer or his or her agent must be present), which are unchanged by the TCJA.
These two categories of expenses are:
- Employee, stockholder, etc., business meetings. This covers expenses incurred by a taxpayer which are directly related to business meetings of his or her employees, stockholders, agents, or directorsFor this purpose a partnership is considered a taxpayer and a partner is considered an agent. The exemption applies only if the meeting is held principally for discussion of trade or business. For example, it would apply where refreshments are furnished to employees at a meeting where they are instructed in a new procedure for conducting the business; or where refreshments are furnished to shareholders at a meeting to elect directors and discuss corporate affairs. The exemption would not apply to: primarily social or nonbusiness meetings; meetings in night clubs, etc., where there is little or no possibility of engaging in active business conduct; and meetings or conventions for the principal purpose of rewarding employees, agents, directors, partners, etc., for their services.
Observation: Before 2018, expenses directly related to business meetings of employees, stockholders, agents, or directors, might have been eligible for a full deduction, which exempted expenses from the 50% deduction limit if they qualified as a de minimis fringe benefit. However, this avenue is closed after 2017, as the TCJA repealed this de minimis fringe benefit exception.
- Meetings of business leagues, etc. This exemption covers expenses for entertainment directly related to and necessary to attendance at business meetings or conventions of any organizations described in Code Sec. 501(c)(6) (such as business leagues, chambers of commerce, real estate boards and boards of trade) and exempt from tax under Code Sec. 501(a).
Source: Thomson Reuters Checkpoint Newsstand May 14, 2018