by Sara Palovick, Real Estate Services Group Team Member
JUne 6, 2018 - Withum
As a result of The Tax Cuts and Jobs Act (“TCJA”), there have been major changes to many of the tax laws that we have come to utilize over the past few decades. An area that is greatly impacted by the TCJA is the area of meals and entertainment deduction.
Under former Internal Revenue Code (the “Code”) Sec. 274(a)(1)(A)-(B), no deduction was allowed for ordinary and necessary expenses for an activity of a type generally considered to constitute entertainment, amusement, or recreation, or for a facility used in connection with such an activity, unless the taxpayer established that the expense was (1) directly related to, or (2), in the case of an item directly preceding or following a substantial and bona fide business discussion, associated with the active conduct of the taxpayer’s trade or business. Meals and entertainment expenses directly related to or associated with the active conduct of a trade or business were then limited to 50% of the expense under former Code Sec. 274(n)(1).
Effective December 31, 2017, the TCJA revised Code Sec. 274(a)(1)(A)-(B), such that a taxpayer is no longer allowed a deduction for any activities with respect to entertainment, amusement, or recreation, or with respect to a facility used in connection with such an activity. This is a tremendous change for many taxpayers, as many are owners of sporting event tickets or frequently take clients to recreational events in order to garner or maintain business. These activities are no longer deductible.
There is good news for taxpayers regarding business dinners. Under the pre-TCJA law, a taxpayer was allowed to deduct 50% of an expense of a business meal, so long as the objective of the event was the active conduct of business, the taxpayer had more than a general expectation of deriving income, or another specific benefit, from the meal, and the taxpayer did, in fact, actively engage in a business meeting, negotiation, discussion, or transaction during the meal. The TCJA left Code Sec. 274(k), Business Meals, with the restriction that it not be lavish or extravagant and that the taxpayer or an employee of the taxpayer be present at the furnishing of the meal.
Another area of the law that is impacted by the TCJA regarding meals relates to meals that are provided by employers for employees. In the pre-TCJA law, meals provided by an employer at an on premise eating facility were exempt from former Code Sec. 274(n)(1) (which limits the expense to 50% deductibility) if they were excludable from the employee’s income as a de minimis fringe benefit under Code Sec. 132(e)(2). For the meals to be considered de minimis fringe benefits, the eating facilities would have to meet two qualifications. The first qualification is that the eating facility be located on or near the business premises of the employer. The second qualification is that the revenue derived from the eating facility be either equal or exceed the direct operating costs of the facility. Under Code Sec. 119(a)(1), employees can exclude from income the value of meals that they receive on the employer’s business premises, for the convenience of the employer. As a result of the TCJA, these meals are now treated as follows. For amounts paid between December 31, 2017 and December 31, 2025, these meals are now subject to the 50% disallowance under Code Sec 274(n)(1). From January 1, 2026 on, no amount paid for employee meals, whether provided either for the convenience of the employer or at an employer-operated eating facility, will be deductible.
It’s clear that there have been many changes to the area of meals and entertainment and this is a subject that impacts more than just real estate – it impacts every single industry.