With the enactment of P.L. 115-97, known as the Tax Cuts and Jobs Act of 2017 (TCJA), tax practitioners must master its many changes to ensure the best tax compliance strategies for their clients. One area requiring attention from professionals is in the deductibility of meals and entertainment expenses.
The deduction has historically been treated with skepticism by Congress due to its concern that businesses commonly claim expenses for activities unrelated to their essential functions, and now Congress in the TCJA has disallowed a deduction for most entertainment expenses. While these concerns are not entirely unjustified, the legislative branch created more confusion as it failed to clearly delineate how and to what extent expenses of a business-related meal accompanied by entertainment or at an entertainment event remain deductible under the TCJA. As practitioners await further guidance from the IRS, they must use due diligence when clients claim any deductions related to business meals.
Prior to the TCJA, it was not necessary to distinguish meals from entertainment at a client outing because a business could confidently deduct both, if they were tied to conducting business. Now that entertainment expenses are no longer deductible, as directed in Sec. 274(a)(1)(A), as amended by the TCJA, taxpayers are left with the burden of determining the deductibility of meals that are paid for in conjunction with entertainment, e.g., a meal at a sporting event. Until the IRS can issue appropriate guidance for this situation, it will be up to taxpayers and their advisers to determine whether taking a deduction for meals at entertainment events is prudent. In the meantime, the AICPA has recommended in a letter to the IRS that meals for which the cost is separately charged at an entertainment event should remain 50% deductible under Sec. 274(n). (The AICPA's letter is available at www.aicpa.org.)
Another area requiring clarification under the law relates to the deductibility of snacks and other food items that employers provide to employees. Prior to the TCJA, Sec. 274(e)(1) and Sec. 274(n)(2)(B) permitted full deductibility of snacks. However, the changes to Sec. 274(n) and the addition of Sec. 274(o) by the TCJA have brought about multiple interpretations as to whether employer-provided snacks remain 100% deductible.
Under revised Sec. 274(n)(1), a snack may equate to an employer-provided meal and hence be limited to a 50% deduction. On the other hand, a tax practitioner could argue that snacks qualify as recreational expenses for the benefit of employees. Sec. 274(e)(4), which was unchanged by the TCJA, states that recreational expenses are explicitly exempt from the 50% deduction limitation assigned to most business meals and are therefore fully deductible. In addition, it has been suggested that a deduction for snacks provided to employees may be disallowed under new Sec. 274(o). Under this section, meals provided in employer operated eating facilities (described in Sec. 132(e)(2)) or for the convenience of the employer (as described in Sec. 119, are nondeductible after Dec. 31, 2025. Accordingly,the AICPA has requested further guidance from the IRS regarding the deductibility of employer-provided snacks and beverages provided to employees in locations other than an employer-provided eating facility as described in Sec. 132(e)(2).
Yet another matter in this area that will require further clarification relates to the deductibility of employer-hosted social activities. Aside from the morale-boosting benefits and networking opportunities that these events provide, they have also been historically considered by business owners as fully deductible under Sec. 274(e)(4). However, now that entertainment expenses are no longer deductible under Sec. 274(a)(1)(A), uncertainty has arisen about whether employer-provided social activities will be cast into the entertainment category and deemed nondeductible as well. As with the uncertainties mentioned earlier, the AICPA has asked for further guidance on whether employer-hosted social events will retain 100% deductibility.
To ensure compliance with the new rules governing applicable meal deductions, tax practitioners should explain them to all affected taxpayers. A tax practitioner should communicate the heightened need for substantiation of all business meals, including who attended the meal and a description of the business conducted. Next, it will be essential to create new accounts that allow for separate tracking of a client's entertainment expenses (now nondeductible) and meals that may qualify as 100% deductible or be limited to 50% under the TCJA. Keeping track of these expenses throughout the tax year will undoubtedly ease the burden for both taxpayer and preparer come tax season.
Mark G. Cook, CPA, CGMA, is the lead tax partner with SingerLewak LLP in Irvine, Calif.
For additional information about these items, contact Mr. Cook at 949-261-8600 or firstname.lastname@example.org.
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