Tax Act Eliminates or Curtails Business Expense Deductions for Entertainment, Commuting Benefits, and Meals
AAFCPAs would like to make clients aware that the Tax Cuts and Jobs Act (“the Act”) has either eliminated or curtailed business expense deductions for most entertainment, meals, and commuting benefits starting in 2018.
Deductions for entertainment expenses that were directly related to, or associated with the active conduct of the trade or business were eliminated by the Act starting in 2018.
As directly-related and associated entertainment expenses are not deductible, the following provisions were removed as a result of the Act:
- The rules that treated a club as an entertainment facility unless it was used primarily to further the trade or business was removed;
- The limit on deductions for tickets to entertainment and sporting events was removed:
- This included the special exception for charitable sporting events;
- Note that while the 50% limit on entertainment expense deduction was removed, the deduction equal to 50% of qualifying meals was not changed by the Act.
Not all entertainment expenses were eliminated; the following remain deductible:
- Certain entertainment expenses for goods, services, and facilities that are treated as compensation to an employee;
- Expenses for recreational, social, or similar activities and related facilities primarily for the benefit of non-highly compensated employees;
- Expenses for entertainment sold to customers; and
- Entertainment expenses for goods, services, and facilities that are includible in the gross income of a non-employee recipient as compensation for services rendered or as a prize or award.
Transportation and commuting benefits
Under the Act, an employer cannot deduct expenses paid or incurred after December 31, 2017 for any qualified transportation fringe, such as: van pools, transit passes, qualified parking, and bicycle commuting.
Additionally, under the Act, an employer cannot deduct expenses paid or incurred after December 31, 2017 for providing an employee transportation, OR reimbursement to an employee for travel between the employee’s residence and place of employment, except as necessary to ensure the employee’s safety. Please note: beginning after 2017 and before January 1, 2026 qualified bicycle commuting benefits will be subject to employer income tax but not wage withholding.
Nothing in The Act will affect the ability of employees to deduct mass-transit and parking benefits purchased with elective tax deferrals of salary.
At this time, unless more guidance by the Internal Revenue Service is released, employers may still offer pretax salary reduction plans to employees for transportation expenses and take the corresponding deduction on the entire amount of wages paid without reducing it by the amount of salary reduction taken by the employee for their pretax contribution to the transportation or parking plan.
Effective January 1, 2018, business deductions for de minimis meals and meals provided for the convenience of the employer at or near the employer’s business premises is limited to 50%. Note that while this deduction is schedule to be completely eliminated as of January 1, 2026, it would not be surprising to see an extension of existing law prior to that time.
The Tax Cuts and Jobs Act represents a dramatic overhaul of the U.S. tax code, including the above noted areas. AAFCPAs advises clients to be aware of these provisions and how they may impact your operations. The tax practice of AAFCPAs will continue to monitor the legislative process and keep you informed as significant changes occur or provisions become clarified.
If you have any questions please contact your AAFCPAs partner, or Richard Weiner, CPA, MST at 774.512.4078 or firstname.lastname@example.org.