The Meals and Entertainment Conundrum
Tara Guler, CPA Jared Kempel, CPA
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• Entertainment and Club Dues • 100% Deductible Expenses • 50% Deductible Expenses • Examples • Fringe Benefits • State Conformity • Practice and Procedures Tax Cuts and Jobs Act (TCJA) of 2017
• Section 274 was amended by the TCJA • Entertainment expenses generally are not deductible • Meals are deductible at 50% Meals and Entertainment
• Entertainment
Effective date – Amounts paid or incurred after Dec. 31, 2017 Prior Law TCJA Application
> Nondeductible expenses: > No deduction was allowed with > No deduction is allowed for an respect to an activity generally activity generally considered to be − Expenses associated with considered to be entertainment, entertainment, amusement or sporting events or golf outings amusement, or recreation recreation (“entertainment”) unless directly − Expenses associated with fishing and hunting trips related to the active conduct of > No deduction is allowed for a − Night club entertainment business (in which case it was facility used in connection with any expenses lim ited to 50 %) of the previously stated > Taxpayers must prove that > Business meals and beverages > Business meals and beverages business was conducted in order associated with entertainment, associated with entertainment, to deduct 50% of food or beverage amusement, or recreation are amusement, or recreation were provided at entertainment, etc. lim ited to 50% lim ited to 50 % events Meals and Entertainment
• Club Dues
Effective date – Amounts paid or incurred after Dec. 31, 2017 Prior Law TCJA Application
> No deduction was allowed for amounts paid or incurred for > No deduction is allowed for membership in any club membership dues for any club organized for business, pleasure, organized for business, pleasure, > Club dues; for example: country recreation, or other social recreation, or other social clubs, golf and athletic clubs, purpose purposes business luncheon clubs, airline and hotel clubs > Any expense in connection with > No deduction is allowed for a its use was disallowed unless facility used in connection with any directly related to the active of the previously stated conduct of business Meals and Entertainment
• 100% Deductible Expenses
Effective date – Amounts paid or incurred after Dec. 31, 2017 Prior Law TCJA Application > A deduction was allowed for expenses for goods, services, and facilities to the extent that > Deduction cannot be more than the expenses were reported by taxpayer’s actual cost even if a the taxpayer as compensation greater amount (i.e. FMV) is and as wages to the employee included in income for purposes of income tax withholding > Agent incentive trip with 1099 > No change under the TCJ A issued to employees > A deduction was allowed for expenses for recreational, social > Occa s iona l cockta il pa rties or or s im ila r a ctivities , or a s s ocia ted picnics for employees and fa cilities , incurred prim a rily for employee significant others (i.e. the benefit of employees other holiday party) than certain owners and highly compensated employees Meals and Entertainment
• 50% Deductible Expenses
Effective date – Amounts paid or incurred after Dec. 31, 2017 Prior Law TCJA Application
> Taxpayers could generally deduct 50% of food and beverage expenses associated > Meals consumed by employees on > No change under the TCJ A with operating their trade or work tra vel s till 50% deductible business (i.e. meals consumed by employees on work travel) Meals and Entertainment
• Business must be discussed to retain 50% deductibility
o Mea ls with c lients
o Meals with coworkers
o Mea ls while tra veling
o Otherwise = entertainment • Exceptions to club dues deductibility
o Boards of trade, business leagues, chambers of commerce, civic and trade organizations
• Payments for sponsoring events (charity dinners, golf outings, etc…) will require separately stating FMV of entertainment, FMV of meal and remainder as sponsorship Meals and Entertainment
• IRS notice 2018-76
o Comprehensive regulations are on the way and will define “entertainment”
o Provides clarifications of 50% deductibility
o Food and beverage provided during entertainment events will not be considered entertainment if purchased separately from the event
o Hot dogs vs. box vs. hot dogs + box example Meals and Entertainment
• 2018-76 clarified that taxpayers may deduct 50% of otherwise allowable business meal expense if:
o The expense is ordinary and necessary under Section 162(a) paid or incurred during the taxable year in carrying on any trade or business
o The expense is not lavish or extravagant under the circumstances
o Taxpayer (or employee of taxpayer) is present at the furnishing of the food or beverages
o Food and beverages are provided to a current or potential business customer, client, consultant or similar business contact Meals and Entertainment
• 2018-76 clarified that taxpayers may deduct 50% of otherwise allowable business meal expense if:
o In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages. Meals and Entertainment
• Example 1
o You drive to meet a client, have dinner with them where substantial business is discussed, attend a sporting event and you drive home. Below is how the expense should be classified:
o Expenses for mileage to and from the time with the client: travel
o Dinner and/or drinks for the night: meals
o Sporting event tickets: entertainment Meals and Entertainment
• Example 2
o You drive to meet a client, attend a sporting event where substantial business is discussed and you drive home. Because the premise of the evening is to attend a sporting event below is how the expense should be classified:
o Expenses for mileage to and from the time with the client: entertainment - mileage
o Drinks for the night: meals
o Sporting event tickets: entertainment Meals and Entertainment
• Example 3
o You pay $5,000 to attend a YMCA golf outing with prospects where substantial business is discussed and the letter breaks out the fees as follows: hole sponsorship $3,500, green fees $1,000, lunch/drinks $500. Below is how the expense should be classified:
o Hole sponsorship: sponsorship
o Green fees:entertainment
o Lunch/drinks: meals Meals and Entertainment
• Example 4
o HR purchases sporting event tickets to give away to employees as prizes: entertainment
o Accounting department going to team building event: meeting expense (100% deductible)
o Employee picnic not for entire company but rather sub-department: 100% meals
o Tickets purchased to give to employees: entertainment, also de minimis fringe benefit Meals and Entertainment
• Fringe Benefits
Effective date – Amounts paid or incurred after Dec. 31, 2017 Prior Law TCJA Application
> Certain employer-provided fringe 1. Amounts paid related to providing benefits were excludable from an food and beverage through an eating employee’s gross income and wages 1. De minimis fringes related to fa cility a re no longer deductible after including: providing food and beverages to Dec. 31, 2025 employees through an eating facility 2. Factors indicating unsafe conditions: 1. De m inim is fringes are subject to 50% limitation the history of crime in the geographic 2. Qualified transportation 2. Qualified transportation fringes are no area surrounding the workplace or fringes longer deductible (unless for safety) residence, and time of day during 3. On-prem is e a thletic fa cilities 3. On-premise athletic facilities remain commute 4. Meals provided for the 100% deductible 3. No change convenience of the employer 4. Meals provided for the convenience of 4. Amounts paid related to meals the employer are subject to 50% provided for the convenience of the > These fringe benefits were also 100% lim ita tion employer are no longer deductible after deductible by the employer Dec. 31, 2025 Meals and Entertainment
• Excludable de minimis fringe benefits:
o Traditional birthday or holiday gifts of property (not cash) with a low FMV
o Flowers, fruit, books, or similar property provided to employees under special circumstances
o These expenses remain 100% deductible by the Company under the TCJ A Meals and Entertainment
• Value of meals furnished to an employee for the convenience of the employer:
o 50% deductible amounts incurred and paid after December 31, 2017 and until December 31, 2025
o Meals must be provided on the employer’s business premises
o Amounts incurred and paid after December 31, 2025 are NOT deductible
o Subject to congressional intervention Meals and Entertainment
• Expenses associated with providing food and beverages to employees through an eating facility:
o 50% deductible for amounts incurred and paid after Dec. 31, 2017 and until Dec. 31, 2025
o Facility must: 1) be located on or near the business premises and 2) derive revenue that normally equals or exceeds the direct operating costs
o Generally, the direct operating costs of the eating facility would be subject to lim ita tion
o Amounts incurred and paid after December 31, 2025 are NOT deductible Qualified Transportation Fringe Benefits
• Nondeductible under the TCJA (unless for safety)
• Generally include:
o Qualified parking (on or near the employer’s business premises or on or near a location from which the employee commutes to work by public transit)
o Primary Use – if 50% of the parking is available to the general public then it is not considered a fringe
o Notice 2018-99 issued in December 2018 provides guidance
o Transit passes o Vanpool benefits State Conformity Issues
• Internal Revenue Code (IRC) conformity refers to whether and how a state has aligned or linked its own income tax code to federal income tax law
• All states incorporate various portions of the IRC into their tax system, but the extent they do so varies widely
• Understanding the intricacies of state IRC conformity is critical because the TCJA broadens the tax base in some cases, e.g., interest expense limitations and narrows it in others, e.g., full and immediate expensing
• IRC conformity will influence which “items” on the TCJA menu of federal tax changes a state will choose to adopt and which it does not State Conformity Issues
Types of Conformity: • When considering how the TCJ A may impact your organization, it is important to understand the manner a state will adopt the IRC: – Rolling date conformity – State automatically conforms to the IRC amendments – Fixed date conformity – State conforms to the IRC as it exists on a certain date o Example: Texas adopts IRC as of Jan. 1, 2007. – Annual conformity – Conformity is fixed to a certain date until a state adopts a new date which is generally done on an annual basis o Example: Idaho adopts IRC as of Jan. 1, 2017. and is expected to adopt conformity to IRC as of Jan. 1, 2018. – Other/select conformity – States adopt only select sections of the IRC State IRC conformity for corporate tax
WA
ME MT ND MN OR VT ID NH WI SD MI NY MA WY CT RI IA PA NV NE NJ OH UT IL IN DE MD CA CO WV MD VA KS MO KY DC NC TN AZ OK NM AR SC
MS AL GA AK TX LA HI FL
Rolling conformity
Fixed date conformity
Annual conformity Other/select conformity Source: Bloomberg Tax No corporate income tax State Conformity Issues
• States that do not conform to federal treatment of meals and entertainment:
o Ca lifornia
o Hawaii
o Massachusetts
o New Hamps hire
o New Jersey
o Texas
o Wis cons in
• Dis a llowed federa l M &E deductions should be allowed for these states Practice and Procedures
Best Practices
Application of Business Data gathering/ new tax purpose collaboration provisions
Communication Documentation Company within and and policies outside tax recordkeeping department Questions or Comments
• Tara Guler, CPA– [email protected]– 608-240-6714
• Jared Kempel, CPA– [email protected]– 608-240-6743