What Businesses Can Deduct for Entertainment, Commuting Benefits, and Meals Under the Tax Cuts and Jobs Act

By Eunice Go

After the Tax Cuts and Jobs Act (TCJA), there are various expenses that businesses can no longer deduct starting in tax year 2018. Generally, prior to 2017 Tax Cuts and Jobs Act (TCJA), employers and other taxpayers could deduct ordinary and necessary business expenses. These included cash and noncash compensation, such as fringe benefits, paid for services rendered. But after TCJA, businesses can no longer deduct most entertainment costs and commuting benefits after 2017. Certain employer-provided meal expenses will also be eliminated after 2025.

How Are Entertainment Expenses Impacted?

Beginning tax year 2018, business deductions are eliminated for most entertainment expenses, [1] even if these expenses are directly related to the taxpayer’s business. [2]

Previously, businesses could generally deduct entertainment expenses if they were directly-related or associated with the active conduct of the taxpayer’s trade or business.

Some entertainment-related rules do not change. Club dues and membership costs are still not deductible. [3] When deductions are not permitted under this rule, the disallowed portion of a facility is treated as a personal asset. [4]

Which Entertainment Deductions Still Qualify

Businesses can still deduct certain entertainment expenses, including:

  1. Certain entertainment expenses treated as compensation for an employee for goods, services, and related facilities
  2. Expenses for recreational, social, or similar activities and facilities for non-highly compensated employees
  3. Expenses for entertainment sold to customers

Under the 2017 Tax Cuts and Job Acts, businesses will not have to provide evidence of the time and place the entertainment occurred to qualify for deductions.

Changes to Transportation and Commuting Benefit Deductions

Employers cannot deduct expenses of any qualified transportation fringe [5] provided to an employee of the taxpayer[6] in the tax year 2018. These nondeductible expenses include transit passes, qualified parking, and bicycle commuting.

Expenses for travel between the employee’s residence and place of employment are no longer deductible if paid or incurred after 2017. This includes transportation, payment, or reimbursement. An exception is made if it is necessary to ensure the employee’s safety. This change does not apply to qualified bicycle commuting reimbursement paid or incurred between December 31, 2017 and before January 1, 2026.

Qualified bicycle commuting benefits can be included in the employee’s income for tax years 2018 through 2025.

Deductions for Employer-Provided Meals

After December 31, 2025, employers may not deduct:

  1. Meals excludable from an employee’s income under Code Sec. 119(a) because they are for the employer’s convenience and on the employer’s business premises
  2. Food, beverages, and facility expenses for meals that are considered low-value, or de minimis, fringe benefits under Code Sec. 132(e)

Employers may continue to deduct 50% of their expenses for food, beverages, and related facilities that are primarily for employees, and on the business premises.

Conclusion

The Tax Cuts and Jobs Act (TCJA) eliminates many employer deductions for entertainment, travel, and food. Employers should become familiar with changing regulations to ensure they file 2018 taxes correctly. Contact your trusted Chugh CPAs, LLP professional today to maximize your deductions and reduce your tax liability.

Citations

[1] Code Sec. 274(a)(1), as amended by the Tax Cuts and Jobs Act.

[2] Tax Cuts and Jobs Act 2017

[3]  Code Sec 274(a)(3)

[4] Code Sec 274(g)

[5] Section 132(f)

[6] Code Sec, 274(a)(4)

References:

IRS Notice 2018-76, I.R.B. 2018-42, October 3, 2018 

https://www.law.cornell.edu/uscode/text/26/274

26 U.S. Code § 119 – Meals or lodging furnished for the convenience of the employer. (n.d.).

26 U.S. Code § 132 – Certain fringe benefits. (n.d.).

Tax Cuts and Jobs Act 2017: Law, Explanation & Analysis, Code §274. (n.d.)