Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.

Meals and entertainment

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, deductions for business-related entertainment expenses are disallowed entirely for amounts paid or incurred after December 31, 2017. As a result, costs that are incurred for events such as client golf outings, sporting events, or concerts are no longer deductible.

Meal expenses incurred while traveling on business and most other business meals are still 50% deductible.  The 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria will no longer be deductible.

There are no changes to the other exemptions from the 50% disallowance for certain expenses as defined in IRC Sec 274(e).  Examples include costs incurred for recreational, social or similar activities primarily for the benefit of employees; items made available to the general public; and entertainment sold to customers.  These expenses remain deductible and are not subject to the 50% limitation.

Transportation

The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.

Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)

Assessing the impact

The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.

© 2018


Erica has more than 20 years of public accounting experience providing comprehensive income tax planning and tax compliance services. She works closely with business and individual clients to successfully manage and minimize their tax liability.
Her expertise includes assisting clients with understanding and properly managing many complex partnership tax issues, as well as tax implications of current or proposed operating agreements.
Prior to joining Hancock & Dana, Erica was employed with Ernst & Young and Arthur Andersen in the Washington, DC metropolitan area.

 

Tags: ,