The Tax Cuts and Jobs Act (TCJA) made significant changes to the deductibility of meal and entertainment expenses. Unfortunately, there’s still a great deal of confusion about which deductions have been eliminated and which remain. Here’s a summary with you, the contractor, in mind.
Entertainment and meals
The TCJA eliminated most deductions for activities considered “entertainment, amusement or recreation,” as well as club memberships — even if substantial business discussions are involved. (We discuss a few exceptions below.) The act also eliminated deductions for the cost of facilities related to entertainment, amusement or recreation activities.
There’s a common misconception that the TCJA also eliminated deductions for business meals. Not true. As before, taxpayers may continue to deduct 50% of eligible meal expenses. In general, a business qualifies for the deduction if:
- The expense is an ordinary and necessary business expense (in other words, business is conducted),
- The expense isn’t lavish or extravagant,
- An owner, executive or employee is present, and
- The meal is provided to a current or potential customer, client, consultant or similar business contact.
What if food and beverages that otherwise meet the above requirements are provided during an entertainment activity? Suppose, for example, that you take a client or prospective client to a baseball game and treat your guest to hot dogs and beer.
According to the IRS, you can deduct 50% of the cost of food and beverages provided during an event so long as they’re bought separately or stated separately on bills or receipts. In the case of a baseball game, the tickets are a nondeductible entertainment expense, but the hot dogs and beer are 50% deductible.
But note that, if you attend the game in a corporate suite that includes food and drinks, the entire cost is nondeductible unless meal costs are reasonable and stated separately in the invoice. (Also note that the TCJA didn’t affect the 50% deduction for meals during business travel.)
Eats on the jobsite
Before the TCJA, construction companies could deduct 100% of the cost of certain meals provided at jobsites or other business premises, provided they were excludable from employees’ income as “de minimis fringe benefits.” These included:
- Meals furnished on or near the employer’s premises for the employer’s convenience,
- Meals provided to employees occasionally or so they could work overtime,
- Certain expenses related to on-premises eating facilities, and
- Water, coffee or snacks made available on the business premises.
The deduction for these expenses has been reduced to 50% and will generally be eliminated after 2025 (though it appears that occasional and overtime meals will continue to be 50% deductible). Even after the deductions are eliminated, de minimis fringe benefits will still be excludable from employees’ income.
A few exceptions
As outlined above, most entertainment is now nondeductible and most meals are 50% deductible. But there are some exceptions. Namely, you can deduct:
- 100% of both meal and entertainment expenses if they’re treated as employee compensation or included in a nonemployee’s income,
- Meal and entertainment expenses that aren’t treated as employee compensation but are reimbursed by customers,
- 100% of the cost of recreational or social activities (holiday parties, picnics or other company outings, for example), so long as they’re primarily for the benefit of employees other than officers, certain owners and highly compensated employees,
- Both meals and entertainment provided at certain employee or stockholder business meetings or conferences, with meals being 50% deductible and entertainment expenses apparently 100% deductible (subject to further IRS guidance), and
- 100% of expenses for attendance at business league events (other than membership dues).
Also, meals and entertainment are fully deductible if they’re provided to the public — for example, at an open house at your office or a jobsite — as are promotional and other expenses related to the event.
Handle with care
We hope this article provides some general guidance, but the rules are complex and subject to change. Contact us about specific expenses to ensure the proper tax treatment.