As it has been stated broadly, the Tax Cut and Jobs Act of 2017 (TCJA) was the largest overhaul of the U.S. tax code in more than 30 years, changing many deductions and adding some complexity to the treatment of business meals and entertainment expenses.
Due to this change, businesses will need to carefully plan for the stricter limits in annual budgeting as well as to adjust employee rules and accounting processes, both to comply with the law and to take advantage of available deductions.
Both entertainment and business meal expenses are impacted by the new law.
Entertainment expenses were previously 50-percent deductible, including event tickets at 50 percent of the ticket’s face value. There is now no deduction for these expenses.
Non-deductible expenses include entertainment at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and outings and vacations relating solely to the employee or his/her family.
Previously, tickets to qualified charitable events were 50-percent deductible. Now there is no deduction.
Employee Travel Meals
Qualified business travel meals were and still are deductible at 50 percent.
Meals Provided for the Convenience of the Employer (for example, an on-premise cafeteria)
These meals were 100-percent deductible if not included in employee gross income—otherwise deducted at 50 percent. Now, the deduction is 50 percent.
Office Party Expenses
These remain 100-percent deductible.
Business Meal Requirements
There are four main rules you can follow in order to prove that your business meals are appropriately treated under the tax code:
- The expenses must be both necessary and ordinary (not lavish or extravagant) in the normal course of business.
- The expenses must be directly and substantially related to the operation or benefit of your business.
- The expenses must be documented and substantiated, including where the meal took place, the date, the business purpose of the meal and the relationship of the people at the meal.
- The business employee must be present at the meal and the other party or parties must be a current or potential client.
Other TCJA Tax Code Changes
It’s important to note that a new tax credit for wages paid to qualifying employees while on family or medical leave can now be applied, up to 25 percent of the wages paid.
Transportation benefits also have changed. Prior to TCJA, there were tax deductions provided for the following benefits. These deductions are now eliminated, but the benefits, if given, are tax-free to employees:
- Mass transit passes
- Commuter highway passes
- Qualified parking fees
Moving expense deductions are eliminated, and certain achievement awards expenses are no longer deductible.
Seek Expert Financial and Accounting Assistance
Don’t navigate the complex tax laws alone. Contact Estess CPAs, based in New Orleans and serving the greater New Orleans area.
Estess CPAs specializes in serving the needs of small businesses with professional accounting, bookkeeping, tax planning and payroll services.