U.S. Tax Deductibility of M&E Expenses After 2017 TCJA
As defined by the Internal Revenue Code (IRC), "entertainment" encompasses activities typically associated with entertainment, amusement or recreation. This includes activities such as attending nightclubs, theaters, and sporting events, as well as participating in hunting, fishing, and similar trips. Additionally, the term "meals" broadly encompasses all expenses related to food and beverages incurred during various business activities.
Before enactment of Tax Cuts and Jobs Act, expenses related to recreation, entertainment, amusement, or facilities hosting such activities were eligible for deduction if the taxpayer could demonstrate a direct connection to their trade or business. However, the deductions were restricted to 50% of the total expenses, with the remaining 50% being permanently non-deductible. Following the enactment of the TCJA, expenses related to recreational activities, entertainment, amusement, and the use of facilities for such purposes are no longer eligible for tax deductions. Additionally, the deductibility of most meal expenses is now limited to 50%.
- Section 274 of the Internal Revenue Code as enacted by the TCJA
Section 274 was enacted in the context of perceived abuses of meals and entertainment expenses, business gifts, and business travel. Ultimately, the entertainment expense deduction was eliminated in the 2017 TCJA, which called into question the deductions for certain business meals. Provisions in Section 274 that affect expenses related to meals and entertainment include the following:
(1)
|
Provides a general rule for non-deductibility expenditures related to entertainment, amusement, recreation, and social activities under Section 274(a).
According to Section 274(a) of TCJA, it now denies deduction for any recreational activity and facility after 1978. In addition, it also denies a deduction for dues or fees paid to any social, athletic, or sports club or organization. Exceptions are made for organizations such as business leagues, trade associations, boards of trade, professional organizations (e.g., bar associations), and civic or public service organizations.
Besides, exceptions to the deduction limitation for expenses related to meals and entertainment include food and beverages provided to employees on the employer’s premises, reimbursed expenses and entertainment expenditures for employees, consisting primarily of expenditures for recreational, social, or similar activities, including facilities for employees (other than certain highly compensated employees), expenditures directly related to business meetings of employees, shareholders, or directors, and programs offered to the public (such as seminars).
|
(2)
|
Strict substantiation requirements are imposed on certain meal and entertainment expenditures under Section 274(d).
Taxpayer must provide sufficient records or evidence, including the amount of the expenditure; the time and place where the expenditure was made; the business purpose of the expenditure and the business relationship between the recipient of the expenditure and the taxpayer.
|
(3)
|
Retained 100% deductibility of certain food and beverage expenditures under Section 274(e), including meals sold to clients or customers; meals provided to employees as long as they are recorded as taxable fringe benefits; and meals provided to the public at no cost, such as those in waiting rooms.
|
(4)
|
Regulation on certain exceptions under Section 274(k), business meals may not be extravagant or profligate and that the taxpayer or the taxpayer’s representative must be present at the meal.
|
(5)
|
Limits the deduction for certain meals and entertainment expenses to 50% under Section 274(n), subject to certain key exceptions for expenses such as employee entertainment.
|
(6)
|
Provides that, certain meals and entertainment, such as expenditures related to employer-operated dining facilities, are not deductible in tax years after 2025 under Section 274(o) of TCJA.
|
- Deductibility of meal expenses under the TCJA
(1)
|
Business meal expenses
The TCJA reduces the deductibility of certain business meals that are considered de minimis fringe benefits from 100% to 50%. As allowed under the Final Regulations and Notice 2018-76, business meals are deductible if several requirements are met:
(a) The expense is "ordinary and necessary" and was paid or incurred during the tax year in carrying on any trade or business.
(b) The expense was not extravagant or profligate under the circumstances.
(c) The taxpayer (or an employee of the taxpayer) is present, and the food or beverages are served to a current or potential business client, customer, consultant, or similar business contact.
|
(2)
|
Meals in the context of an entertainment event
Although "entertainment" expenses were disallowed after the TCJA, Notice 2018-76 and the resulting Final Regulations preserve the meal deduction (subject to the 50% limitation) for entertainment, provided that the cost of food and beverages is separately identified on the invoice or receipt.
|
(3)
|
Meals at work conference
After the TCJA, the deduction for work conference meals remained at 50%. Work conferences are an exception to section 274(a). This indicates that recreational facilities reserved for work conferences are fully deductible.
|
- Deductibility of entertainment expenses under the TCJA
(1)
|
Expenses for company holiday parties and other employee outings
The passage of the TCJA also calls into question the deductibility of company holiday parties and other company outings, such as summer picnics. However, these activities remain fully deductible under the Act:
(a) Section 274(a)(1) of the Internal Revenue Code prohibits the allowance of a deduction for entertainment expenses. However, an exception is outlined in Section 274(e)(4) for entertainment, social, or similar events, including facilities, that are primarily held for the benefit of employees, excluding certain highly compensated employees.
(b) In addition, section 274(n)(2)(A) excludes such expenditure costs from the 50% deduction limitation under section 274(n)(1). Thus, even after the TCJA, these expenses will remain 100% deductible.
|
(2)
|
Membership fees in clubs and organizations
Even before the TCJA, deduction for membership in clubs and organizations was limited:
(a) Prior to the TCJA, dues paid by social, athletic, or sports club organizations were generally not deductible, with an exception that allowed a deduction where the dues were related to the taxpayer’s business. Dues paid by clubs organized for business, pleasure, recreation, or other social purposes were generally nondeductible, except for certain civic organizations.
(b) After the TCJA, all dues or fees paid to social, athletic, or sports clubs or organizations, whether or not related to the taxpayer’s business, are nondeductible. Generally, amounts paid for membership in clubs organized for business, pleasure, recreation, or other social purposes remain nondeductible (with limited exceptions for certain civic organizations).
|
(3)
|
Transportation expenses
The Regulations treat transportation costs associated with recreational activities as recreational expenditures, so the deduction for recreational-related transportation expenditures will be eliminated upon the TCJA. Non-entertainment transportation generally remains fully deductible. For example, transportation expenses to a business meal are not considered entertainment and are deductible.
|
- Deductibility of de minimis fringe meal and entertainment
Prior to the TCJA, de minimis fringe meals and entertainment expenses, such as employer-provided snacks or overtime meals (curfew pay), qualified for full deduction under former section 274(n)(2)(B). However, the TCJA made two vital changes:
(1)
|
The TCJA removes the exception to the 50% limit in former section 274(n)(2)(B), thereby making de minimis fringe meal and hospitality expenditures subject to the 50% limit.
|
(2)
|
For tax years after 2025, new section 274(o) eliminates the deduction for de minimis fringe meals and entertainment expenses.
|
Reference:
https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses
https://www.irs.gov/pub/irs-drop/n-18-76.pdf
https://www.irs.gov/newsroom/irs-issues-final-regulations-on-the-deduction-for-meals-and-entertainment
https://www.irs.gov/newsroom/irs-updates-guidance-on-business-expense-deductions-for-meals-and-entertainment
|
