The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the entertainment deduction but kept the deduction for travel expenses generally intact. Major changes to business meal expenses were initially introduced by the IRS without providing clear and comprehensive guidance, leaving business owners uncertain about what can be deducted against earned income. Read on for a breakdown of key takeaways from the TCJA changes and how they may impact you.
- Prior to 2018, unreimbursed employee travel expenses were deductible as miscellaneous deductions subject to a 2% adjusted gross income (AGI) limitation on the employee’s personal income tax return, Form 1040. Typical unreimbursed expenses such as hotel costs, airfare, parking, mileage, and rental car fees were allowable deductions until TCJA repealed 2% miscellaneous deductions, which included unreimbursed employee travel expenses.
- Businesses and self-employed individuals can still deduct eligible travel expenses on their business return or Schedule C.
- Employers should consider the negative impact that the new rules have on their employees’ bottom line and review their existing travel reimbursement policy or evaluate the pros and cons of establishing one.
- The deduction for moving expenses associated with permanently relocating for a new job (i.e. moving household goods, personal effects and lodging) has been suspended from 2018 through 2025 for all nonmilitary taxpayers. There are certain exceptions for spouses and dependents of active duty military personnel.
- Any reimbursement received from an employer for the cost of moving is considered to be a fringe benefit and taxable income to the employee
- A business can still deduct the amount paid to an employee for job relocation; however, only members of the Armed Forces on active duty can deducting moving expenses on Form 3903 of their personal income tax return.
- Self-employed individuals can still deduct moving expenses related to business assets.
Meals and Entertainment
Since 1986 Congress has considered business meals to be a form of entertainment, but as long as a bona fide and substantial business discussion took place, both business meals and entertainment expenses were deductible at 50% of the total cost. TCJA amended sections of the Internal Revenue Code to completely disallow deductions for entertainment, amusement, or recreational expenses but other Code sections still allow a deduction for business meals.
The confusion and uncertainty surrounding this topic forced the IRS to issue interim guidance which can be relied upon until final regulations are issued by the Treasury.
Within this Notice are five criteria that must be met in order to claim a deduction for business meals:
- The expense is ordinary and necessary in carrying on any trade or business
- The expense is not lavish or extravagant
- The taxpayer or employee of the taxpayer must be present
- Food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact
- Food and beverages are purchased separately from the entertainment activity or separately stated from the cost of entertainment on the invoice, bill, or receipt. Inflating the amount charged for food and beverages is not allowed.
The last item from the above list creates an additional layer of recordkeeping for taxpayers to be mindful of. If you are attending a sporting event, recreational event, or similar entertainment activity, business owners or employees incurring the expense must be careful when purchasing tickets with food and beverage built-in to the purchase price. Structuring the itemization of the bill in advance with the event organizer or sales representative will help preserve and substantiate valid deductions for your business.
Meals for the Convenience of the Employer
Before the enactment of TCJA, the cost of employer-provided meals at the workplace was 100% deductible and excluded from employee income. Fast-forward to the current TCJA era: Under the most recent written guidance provided by the IRS in January 2019, if meals are furnished to employees, the employee must include the cost of meals in their gross income, unless the meals were provided for a substantial non-compensatory business reason of the employer.
Online ordering and meal delivery options may affect the employee income exclusion as well. If you are able to meet the non-compensatory business reason criteria, the deduction is now limited to 50% through 2025, and will be fully nondeductible starting in 2026. Snacks, however, continue to be fully excludable from employee income as a de minimis fringe benefit, subject to the 50% business deduction limitation.
Substantiating the exclusion from employee income is very facts and circumstances oriented. The first step to meeting IRS standards is to review your business’s existing meal policies, procedures, and other supporting documentation. Friedman has the resources to help clients manage this administrative burden.
If you have questions about the effect of the new regulations on your business or personal taxes, please contact Michael Pace, Senior Tax Manager, High Net Worth Tax Practice at 973-929-3514 / MPace@friedmanllp.com or Michael Greenwald, Partner and Business Entity Tax Practice Leader at 212-842-7513 / MGreenwald@friedmanllp.com.