Tax reform changes related to meal and entertainment expenditures

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March 2018

Overview

Under prior law, a taxpayer could deduct 50% of entertainment, amusement, or recreation expenses incurred for activities that were directly related to (or associated with) the active conduct of its trade or business, or a facility used in connection with such activity (Sections 274(a)(1) and (n)(1)). For amounts paid or incurred after December 31, 2017, unless otherwise noted below, the 2017 tax reform reconciliation act, also known as the ‘Tax Cuts and Jobs Act’ (the Act), has eliminated the deduction for expenses related to entertainment, amusement, or recreational activities. The Act also significantly limits an employer’s ability to fully deduct expenditures associated with de minimis fringe benefit meals, as well as meals provided for the convenience of the employer at an employer-operated eating facility. The wage exclusions for these benefits are not be impacted; therefore, such benefits remain excluded from employee wages.

The takeaway

The Act eliminates or significantly limits taxpayers’ deductions for meal and entertainment expenses, as well as certain fringe benefit expenses, incurred in relation to business activities of the taxpayer after December 31, 2017.

Taxpayers should begin to evaluate the impact of the tax reform changes on internal and external entertainment activities. Taxpayers also should begin creating new general ledger accounts to properly account for such expenses.

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Brad White

Partner, Accounting Method and Fixed Asset Services Leader, PwC US

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