July 12, 2018
How Tax Reform Affects Meals, Entertainment and Transportation Deductions
Posted by Christy Calderon
Many of our clients have expressed concern about how the meals and entertainment revisions of the Tax Cuts and Jobs Act (TCJA) will affect their business. While the new rules actually streamline and simplify deductibilty requirements, getting used to them takes time. We’ve distilled the answers to client questions in the hopes that you and your business can benefit.
In short: All meal-related expenses (with a few exceptions) are now 50 percent deductible, non-meal-related entertainment expenses are no longer deductible, and a number of fringe benefits to employees have been eliminated. Below, we’ve provided examples of deductions from previous tax years and compared them to the new regulations under the TCJA.
Prior to 2017, office parties like the summer company BBQ were 100 percent deductible. Hot dogs, hamburgers, potato salad and corn on the cob, all could be fully deducted. That hasn’t changed under the TCJA. Whole company or department-specific parties are still completely deductible, as long as everyone is invited. So at your sales department’s annual Oktoberfest, all the beers and brats are covered, but a dinner for your top performers won’t qualify for the 100 percent deduction.
In-House Meals and Snacks
Before the passage of the TCJA, employer-provided Taco Tuesdays and refrigerators full of Pamplemousse LaCroix were 100 percent deductible. In 2018, meals for the convenience/benefit of the employer and office snacks are now deductible at 50 percent (and that will drop to zero deduction in 2026). So when crunch time for your accounting department rolls around, you’ll only be able to claim half the cost of those late-night pizzas and salads that you order to keep the team going.
If members of your organization spend a lot of time on the road, their eating habits don’t need to change to conform to the new regulations. All travel meals, whether it’s an airport bagel or room service at a hotel, remain 50 percent deductible in 2018 and beyond, just as they were in prior tax years.
Account managers and salespeople who take clients to dinner don’t need to adjust their entertainment strategies. Prior to the TCJA, client meals were deductible at 50 percent, and that deduction carries over under the new law. So there’s no need to hesitate to slap down the company credit card when taking key accounts out for steak or cocktails.
However, big changes have occurred in other areas of client entertainment. Pre-2018, businesses could claim a 100 percent deduction on tickets for charitable events, a 50 percent deduction on the face value of tickets for events of the non-charitable variety, and a 50 percent deduction for other forms of client entertainment.
Those entertainment deductions are no more. The TCJA has repealed the deduction for entertainment, amusement or recreation activities, even if they are directly related to active conduct of taxpayers’ trade or business. This means that your company’s box seats at the Coliseum or the Shark Tank can no longer be deducted, nor can tickets to the annual SPCA benefit gala.
In previous years, it was possible for businesses to deduct the cost of transportation benefits provided to employees like parking, transit passes and bike commuting reimbursement payments. Under the new regulations, business deductions for expenses incurred by travel between the employees’ residence and workplace are no longer allowed. However, if a company chooses to continue offering transportation reimbursement, employees can still exclude benefits received from income.
There are two exceptions to the repeal of transit benefits; expenses related to transportation that are considered necessary for employee safety will continue to be deductible, as will bike commuting reimbursements. Bike commuters can be reimbursed a maximum of $20 for each month they use a bicycle for a substantial portion of their commute (as long as they receive no other transit benefit).
Employee Achievement Awards
Another benefit that has been changed concerns employee achievement awards. Everyone appreciates a spot bonus for recognition of their hard work, and in past years, employee rewards could consist of anything with a dollar limit of $400 per award, and a $1600 maximum for the year, without having to declare it as income.
While the dollar limits remain unchanged, cash is no longer deductible (for businesses or employees), nor are gift cards, coupons or certificates. Gifts must be tangible goods, which also rules out meals, vacations, lodging, stocks or bonds. Your employees won’t have to declare a $300 pair of headphones if you give them outright, but they will be on the hook if you give them a gift card to buy those same headphones at their local electronics store.
Accounting for the New Rules
Changes to deductions for meals, entertainment and transportation expenses could have an impact on your organization’s budget, but the TCJA’s new rules actually simplify how your company will need to track the remaining deductions. On your chart of accounts, break out your meals and entertainments accounts into 50 percent deductible accounts (for meals) and non-deductible accounts (entertainment, transportation), with one line item for 100 percent deductible office parties.
Though the new rules mean you won’t be able to deduct as much for meals, entertainment and transportation, consider your overall tax savings before eliminating benefits that make your employees’ lives easier. The changes above will likely have far less of an impact on your business than other aspects of tax reform, such as the lower corporate tax rate and the repeal of the alternative minimum tax (AMT).
Public accounting experience since 2001 with a specialization in corporate tax services for high-tech companies. Christy began her career with tax internships at Andersen and Deloitte in San Francisco before beginning full time with Deloitte and later joining Armanino where she has been over a decade. She has extensive experience in corporate taxation including tax provisions and ASC740-10 analysis. She specializes in corporate tax provisions for multi-national public and pre-IPO corporations. She provides excellent tax consulting services and reviews many tax returns with multi-state and international filings for public and pre-IPO corporations. Christy is passionate about training and mentoring her team of outstanding professionals and was the first recipient of the Jeff Soulages Values Award at Armanino. She is a California CPA and a member of the AICPA.