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This Alert was revised on September 19, 2019 to clarify the deductibility of employer-operated eating facility expenses and meals provided for the convenience of the employer.

The "Tax Cuts and Jobs Act" (the Act) made significant changes to the business provisions that affect a company's ability to deduct meal and entertainment (M&E) expenses. The Act completely eliminated an employer's ability to deduct entertainment expenses (even if those expenses were for business). The Act also significantly limited an employer's ability to deduct expenses associated with de minimis meals, including meals provided at an employer-operated eating facility or meals provided for the convenience of the employer.

This Tax Alert highlights what taxpayers must consider now to make sure they fully comply with the M&E provisions of the Act.

Entertainment, recreation, social and similar expenses

Prior law

Under prior law,¹ Section 274 prohibited deductions for expenses related to meals, entertainment, amusement or recreational activities, or facilities (including membership dues), unless such expenses were ordinary, necessary and directly related to the active conduct of the taxpayer's trade or business. If a taxpayer was able to demonstrate that such expenses were ordinary, necessary and directly related to its trade or business, the taxpayer could deduct up to 50% of such M&E expenses.

Even though most M&E expenses were only 50% deductible, taxpayers could deduct 100% for certain qualified expenses, including:

1. Qualified de minimis meals provided to employees
2. Meals provided on or near the business premises of the employer in an employer-operated eating facility
3. Meals provided for the convenience of the employer

In addition, the following expenses were, and remain, 100% deductible:

1. Amounts reported as compensation to an employee
2. Amounts includable in the gross income of a recipient who is not an employee
3. Certain reimbursed expenses, including reimbursement arrangements in which an employer reimburses the expenses incurred by a subcontractor's employees
4. Items made available to the general public
5. Expenses for goods or services (including the use of facilities) that are sold by a taxpayer to customers in a bona fide transaction for adequate and full consideration
6. Qualified employee recreation, social or similar activities (including facilities) primarily for the benefit of employees (other than employees who are highly compensated employees (within the meaning of Section 414(q))

Additionally, these amounts were 50% deductible under prior law and remain 50% deductible under new law:

1. Expenses for food and beverages provided primarily for the benefit of employees furnished on the taxpayer's business premises
2. Expenses incurred by a taxpayer directly related to business meetings of employees, shareholders and agents or directors
3. Expenses directly related and necessary to attend business meetings or conventions for business leagues, chambers of commerce, real estate boards, boards of trade and any entity that is tax-exempt under Section 501(a)

New law

The Act modifies Section 274 by making all entertainment expenses, including facilities used for such activities, nondeductible, even if these expenses directly relate to, or are associated with, the conduct of business. Business meals and beverages, however, remain 50% deductible.

Hence, all forms of business entertainment, including golf outings, fishing, sailing, sporting events, hunting, theater tickets, license fees paid to sporting arenas, golf club dues, etc. are entirely nondeductible, even if a substantial and bona fide business discussion is associated with the activity. Taxpayers may still deduct 50% of food or beverages incurred at such events, but only if they can prove that business was conducted.

The only recreation expenses that might still be 100% deductible are expenses for recreational social, or similar activities (including facilities) primarily for the benefit of employees; this exception, however, is extremely limited.

Effective date

These changes are effective for amounts paid or incurred on or after January 1, 2018.

Taxpayer considerations

Taxpayers should assess their current policies to determine if the changes under the Act will warrant a change in their business expense policy or if system changes are necessary. In many instances, taxpayers do not separately track food/beverage expenses and entertainment expenses. In addition, substantiation for such expenses does not always separately state how much of an expense relates to food/beverages and how much relates to entertainment.

Now that entertainment is nondeductible, taxpayers should also assess their current inventory of licensing agreements with entertainment venues, social clubs and other entertainment/recreation facilities.

Employer-operated eating facilities

Prior law

Section 274(n)(2)(B) permitted a taxpayer to take a 100% deduction for a qualified employer-operated eating facility (e.g., company cafeteria) as defined in Section 132(e)(2). To satisfy the requirements under Section 132(e)(2), the taxpayer had to satisfy the following criteria:

• The facility had to be owned or leased by the employer.
• The facility had to be operated by the employer (whether directly or through a contract with a caterer or similar vendors).
• The facility had to be on or near the employer's business premises.
• Revenue from the facility had to equal or exceed the cost of operating the facility.
• Meals had to be served during or immediately before or after the employees' workday.
• The facility had to be open and available to all employees in general.

New law

The Act strikes Section 274(n)(2)(B) from the Code. Accordingly, meals that were previously 100% deductible pursuant to Section 274(n)(2)(B) are now governed by Section 274(n)(1) and are 50% deductible. In 2026, new Code Section 274(o) will become effective. Section 274(o), once effective, will completely eliminate any deduction for expenses incurred to operate an employer-operated eating facility (including expenses for food or beverages).

Effective date

For amounts paid or incurred beginning January 1, 2018 through December 31, 2025, taxpayers may deduct 50% of the costs for food or beverages provided in an employer-operated eating facility, and 100% of non-meal costs associated with the operation of such facility. For amounts paid or incurred after December 31, 2025, no deduction will be allowed for any of these expenses.

Taxpayer considerations

Taxpayers with an employer-operated eating facility should review expenses associated with the operation of such a facility, and determine if the limitation (and eventual denial) of a deduction for these expenses warrants a change in the taxpayer's policy or practices with regard to the facility.

De minimis meals provided for the convenience of the employer

Prior law

Previously, Section 119(a) allowed meals furnished to an employee for the convenience of the employer to be excludable from the employee's gross income. Treas. Reg. Section 1.119-1(a)(2) stipulated that meals were provided "for the convenience of the employer" only if they were provided for a "substantial non-compensatory business reason of the employer." Even though meals qualified as a de minimis fringe benefit and hence were excluded from an employee's income, the employer was still subject to the 50% limitation unless it met the provisions found in Sections 274(n)(2)(B), 132(e)(2) and 119, in which case the employer was entitled to a 100% deduction for those meals.

Furthermore, under Section 119(b)(4), an employer that provided more than half of its employees with meals both on the employer's business premises and for the convenience of the employer was entitled to a 100% deduction for all expenses attributable to the operation of the eating facility.

New law

The Act strikes Section 274(n)(2)(B) from the Code. Accordingly, meals that were previously 100% deductible pursuant to Section 274(n)(2)(B) are now governed by Section 274(n)(1) and are 50% deductible. In 2026, new Code Section 274(o) will become effective. Section 274(o), once effective, will completely eliminate any deduction for meals provided for the convenience of the employer under Section 119(a), without regard to whether the meal is furnished at an employer-operated eating facility.

Effective date

For amounts paid or incurred beginning January 1, 2018 through December 31, 2025, taxpayers may deduct 50% of the costs of meals provided for the convenience of the employer. For amounts paid or incurred after December 31, 2025, no deduction will be allowed for these expenses.

Taxpayer considerations

Taxpayers should assess their policies for employee meal expenses, and determine if the changes under the Act will warrant a change in their business expense policy as it pertains to meals provided for the convenience of the employer.

Other commentary

Even though meals provided for the convenience of the employer are no longer deductible after December 31, 2025, it may be possible for a taxpayer to still take a 50% deduction if it can make the case that such meals were business food and beverages for employees that fall within Section 274(n)(2)(A) and 274(e)(1), which were not eliminated by the new Act.

Other de minimis meals

Prior law

Section 274(n)(2)(B) allowed a 100% deduction for food or beverages, if such expense was excludable from the gross income of the recipient as a de minimis fringe benefit under Section 132(e).

Section 132(e)(1) provided that a de minimis fringe benefit included any property or service provided to employees if the value (after taking into account the frequency with which similar fringes were provided by the employer to employees) was so small as to make accounting for it unreasonable or administratively impracticable.

Treas. Reg. Section 1.132-6(d)(2) provided the following examples of expenses that could be de minimis fringe benefits:

• Meals or meal money provided to the employee on an occasional basis.
• Meals or meal money provided to an employee because overtime work necessitates an extension of the employee's normal work schedule.
• For a meal or meal money, the meal or meal money was provided to enable the employee to work overtime.

New law

The Act strikes Section 274(n)(2)(B) from the Code, so de minimis fringe meals that were previously 100% deductible pursuant to Section 274(n)(2)(B) are now governed by Section 274(n)(1) and are 50% deductible. In 2026, Section 274(o) will eliminate any deduction for Section 132(e)(1) de minimis fringe meals if associated with an employer-operated eating facility.

Effective date

These changes are effective for amounts paid or incurred on or after January 1, 2018.

Taxpayer considerations

Taxpayers should assess whether the reduction in the deduction for de minimis fringe meals to 50% for expenses incurred on after January 1, 2018, warrants a change in their expense or reimbursement policy for such fringe benefits.

Other commentary

Even though de minimis fringe meals are no longer 100% deductible under Section 274(n)(2)(B), it may be possible for taxpayers to still take a 50% deduction if they can make the case that such meals were business food and beverages for employees that fall within Sections 274(n)(2)(A) and 274(e)(1), which were not eliminated by the new Act.

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ENDNOTES

¹ For purposes of this Alert, references to "prior law" means the law that was in effect before President Donald Trump signed the Act into law on December 22, 2017.