The Tax Cuts and Jobs Act (TCJA) made sweeping changes to numerous sections of our tax law. Many new provisions have been widely discussed, but meals and entertainment, which has not been as extensively publicized, deserves thoughtful consideration. It’s not a significant new tax benefit; in fact, it further limits deductions for taxpayers. But it’s pervasive – it will affect almost every business filer and requires a change to a company’s recordkeeping. In order to avoid filing delays, increased compliance costs or (worst of all) the inadvertent disallowance of costs that are either partially or fully deductible, most taxpayers need to make an immediate change in bookkeeping and accounting procedures.
Before the TCJA, many meal and entertainment expenses were comingled in one trial balance account. As of January 1, 2018, the deductibility of these items has been significantly altered. To help you properly classify these expenses, and maximize your deductions, read on. Below we explore different categories of meals and entertainment, each of which should be tracked separately.
Entertainment Expenses
Previously, entertainment, amusement and recreation expenses were disallowed “unless the taxpayer establishes that the item was directly related to… the active conduct of the taxpayers’ trade or business.” This included “an item directly preceding or following a substantial and bona fide business discussion, such as client meals, sporting events, playing golf, etc.”
These expenses were subject to a 50 percent disallowance.
Entertainment, amusement and recreation expenses are disallowed.
This includes membership dues with respect to any club organized for business, pleasure, recreation, or other social purposes. It also includes a facility in connection with any of these items.
See Fully Deductible Meals & Entertainment for exceptions.
There is an objective test for special circumstances, defined in Sec 1.274-2(b)(1)(ii). Ex – theater tickets for a professional theater critic.
Meals with no Business Purpose
Tickets and Boxes to Sporting Events
Theater Tickets
Golf Outings
Fishing, Sailing, Hunting Outings
Dues to Country Clubs, Golf and Athletic Clubs, Airline Clubs
Business Meals Expenses
A deduction was allowed for meals that are ordinary and necessary to the operation of an active trade or business.
There was little need to establish that a meal had a bona fide business purpose. If there was a substantial business discussion before or after the meal, it would, at a minimum, qualify as deductible entertainment.
These expenses were subject to a 50 percent disallowance.
The deduction for meals ordinary and necessary to the operation of an active trade or business remains in place, subject to a 50 percent disallowance.
Entertainment expenses are no longer deductible. Therefore, a taxpayer must establish a business purpose for a meal to be deductible.
See Employer-Provided Meals exception.
See Fully Deductible Meals & Entertainment for exceptions.
The burden of proof to establish that a business meal is not an entertainment expense, remains on the taxpayer. Be sure to maintain documentation.
Tax professionals are awaiting further guidance in this area.
Business meals deemed ordinary and necessary
Meals provided to employees while traveling
Employer Provided Meals
Meals provided for the convenience of the employer, including those at an employer-provided facility, employee meals provided occasionally, overtime employee meals, and water/coffee/snacks provided in the office were fully deductible, not subject to the 50 percent disallowance.
Employer-provided meals are no longer fully deductible and are thus subject to the 50% disallowance. Furthermore, the TCJA explicitly disallows any deduction for de minimis fringes and meals for the convenience of the employer, including those at an employer-provided facility, beginning in 2026.
Be sure to account for Employer-Provided Meals separately.
Fully Deductible Meals and Entertainment Items
Previous Law and TCJA Law ~ These items remain fully deductible entertainment expenses. Be sure to track and account for these items separately so they are not disallowed.
To the extent an entertainment expense is treated as compensation to an employee and reflected on their W-2, the expense is fully deductible as compensation.
Similarly, payments to contractors, as long as the amounts paid are includable in the gross income of the non-employee, are fully deductible.
Generally, to the extent a taxpayer receives reimbursement for meals and/or entertainment expense, a full deduction is allowed.
Recreational, social or similar activities (including facilities) primarily for the benefit of employees (other than highly compensated employees). This includes holiday parties, annual picnics, summer outings.
Meetings of employees, shareholders, directors, etc. will remain fully deductible as long as the meeting has a bona fide business purpose, such as employee team building, and awards dinners.
Entertainment activities made available to the public remain fully deductible.
Entertainment, provided as a product and sold to customers, will be fully deductible as long as it is sold in a bona fide transaction for adequate and full consideration.
Entertainment-related to attendance at bona fide business meetings or conventions of 501(c)(6) organizations are fully deductible. This includes professional associations, business leagues, chambers of commerce, etc.
Gifts, such as unaccompanied tickets to entertainment events, should be classified as gifts and subject to annual gift deduction limitations.
How to Become/Remain Compliant
- Make sure your general ledgers and accounting systems have a category to record just pure “entertainment” expenses.
- Bifurcate “entertainment” from “business meals”, “employer-provided meals”, “fully deductible meals and entertainment” (described above: compensation, reimbursements, etc.) and travel expenses. (Travel is 100% deductible except for meals portion of travel which is 50 percent deductible).
- Don’t overlook amounts that are not subject to disallowance or are disallowed at 50 percent, as detailed above. This would lead to inadvertently limiting fully deductible expenses.