New Limitations on Meal and Entertainment Expenses

Under the 2017 tax reform reconciliation act—also referred to as the Tax Cut and Jobs Act (TCJA)—meals and entertainment expenses incurred or paid after December 31, 2017, may be subject to new limitations.

Overall, there are fewer deductions available now—including the elimination of the entertainment-expense deduction, which impacts entertainment meals. Taxpayers, including tax-exempt organizations reporting unrelated business income, will want to ensure they’re classifying these expenses properly and applying the appropriate limitation.  

Nondeductible

Prior to tax reform, taxpayers were allowed a 50% deduction for expenses related to all business meals that weren’t lavish or extravagant under the circumstances if the taxpayer or an employee was present. Under the new law, however, entertainment expenses associated with a taxpayer’s trade or business are nondeductible—even if the taxpayer pays for the meal.

Food and beverage expenses incurred before, during, or after an entertainment event can retain the 50% deduction, however, as long as they’re either:

  • Separately purchased from the entertainment
  • Separately stated on an invoice or receipt

This distinction means entertainment meals should now be treated differently from client-business meals. As such, organizations may want to consider establishing new documentation procedures that categorize meals into these separate categories.

Some additional business expenses were and remain nondeductible and should be categorized as such:

  • Lunch with a customer, client, or employee without a business purpose or related discussion
  • Club dues, such as golf or country clubs and athletic clubs
  • Lavish or extravagant entertainment expenses

50% Deductible

Meals with Clients, Customers, and Vendors

A 50% deduction is allowed for meals with people related to a business—such as clients, customers, and vendors—as long as the following criteria are met:

  • There’s a business purpose or resulting benefit to the business.
  • The taxpayer is present.
  • The amount isn’t lavish or extravagant.

Examples of eligible meals include the following:

  • Meals during office meetings that include employees, stockholders, agents, or directors
  • Meals during business travel and at conventions, conferences, or seminars
  • Any other type of meeting event

Employer-Provided Snacks and Beverages

Under prior law, the value of employer-provided snacks and beverages was 100% deductible to an employer. Upon enactment of the TCJA, certain employer-provided meals are only 50% deductible from 2018 through 2025. These include the following:

  • Meals provided for the convenience of the employer, on the employer’s premises
  • Office snacks, water, and coffee
  • Meals provided as part of a package involving a charitable sport ticket

This means the next time pizzas are ordered for employees working overtime—barring any changes from Congress—taxpayers will no longer be able to take the full deduction. Additionally, without further action by Congress, those meals will become fully nondeductible after 2025.

100% Deductible

Employers are still entitled to deduct 100% of costs incurred to host a recreational, social, or similar event as long as the activity is open to all employees and doesn’t discriminate in favor of highly compensated employees. This means not-for-profit organizations may still deduct the full expense of their next picnic or holiday party.

Any food made available to the public for free is also fully deductible as well as any meals included as taxable compensation for an employee or independent contractor and included on his or her W-2 or Form 1099.

Tax-exempt entities may wish to review the impact these changes may have on their formal or informal entertainment as well as meal offerings.

We’re Here to Help

To better understand if your organization is set up to properly capture employee meals or recreation expenses, contact your Moss Adams professional.