by Greg Yoder, CPA
The Tax Cuts and Jobs Act – in addition to its more sweeping changes – made a number of small but impactful changes in the sorts of benefits and expenses that business taxpayers can deduct.
The new law contains a deduction disallowance for employer-provided transportation benefits, including parking. Under old law, employers could provide relatively generous parking allowances to employees, and these amounts would be both deductible by the employer and excludable by the employee. The new law maintains the employee exclusion but removes the employer deduction. Alternatively, the employer may deduct the amounts, but then must include them in the employee’s taxable compensation.
There is some ambiguity in the law, and we had hoped that by moving parking benefits to a salary reduction arrangement (SRA), employers would be able to deduct the allowances as compensation while maintaining the exclusion for employees. IRS has clarified that this strategy will NOT be effective: parking-related amounts paid under an SRA will not be deductible by the employer. This leaves employers with two unappealing choices: either report additional taxable compensation to the employee (and get the deduction) or lose the deduction to maintain the employee’s exclusion.
Under former law, most entertainment expenses were limited to 50% deductibility, provided taxpayers could establish a sufficient business purpose for the expenditures and meet some other requirements and limitations.
The new law eliminates the deduction for most entertainment expenses, including a complete elimination of deduction for entertainment activities and facilities. The change also eliminates any deduction for dues or fees paid to any “social, athletic, or sporting club or organization.” Club dues for business and social clubs continue to be disallowed in full, as under former law.
There are a few exceptions. Most notably, recreational expenses for employees continue to be deductible in full – as they were when other entertainment expenses were limited to 50% deductibility. These expenses won’t be deductible, however, if they primarily benefit highly compensated employees, another requirement that hasn’t changed from former law.
Food and Beverage Expenses
While the entertainment portion of “meals and entertainment” has largely been disallowed, the changes to the meals portion are more complicated. This area has always been one that is ripe for nitpicking, and it hasn’t gotten any simpler under the new law. There’s a mixture of full deductibility, 50% deductibility, and no deductibility at all. But what expenses fall into which category has changed slightly. Some of the changes apply to very narrow groups of taxpayers, but others apply more broadly.
Meals provided to employees for the benefit of the employer (e.g., busy season lunches and dinners for hard-working accountants) were previously deductible in full. Under the new law, these amounts will only be 50% deductible. (Note that meals provided as part of employee recreational/social activities remain deductible in full, raising the possibility that employer-provided meals could be fully deductible as long as the employees are having enough fun. Obviously, this is not an issue for hard-working accountants during tax season, but there may be a gray area in other cases.)
Under former law, expenses for employer-provided eating facilities were entirely deductible because they were considered de minimis fringe benefits. Under the new law, they’re 50% deductible for expenses arising between January 1, 2018 and December 31, 2025. Thereafter, these expenses will be disallowed in full.
As with many other Tax Cut and Jobs Act provisions, the details are more complicated than what we’ve summarized here, and it’s important to get the details right. If you have questions about any of these provisions, please contact us.