The Tax Cuts and Jobs Act (TCJA) of 2017 changed the deduction businesses are allowed for meals and entertainment. Upon passage of the TCJA, the IRS pointed out that the TCJA made it clear that expenses for business entertainment were no longer deductible but that the TCJA didn’t make clear the impact of the deductibility for business meals, which wasn’t Congress’ intent. At the time the IRS issued guidance to help clear up the omission in the TCJA, subsequently it issued proposed regulations for taxpayers to follow and now, as of last Wednesday, September 30, 2020, have issued final regulations on this topic. The final regulations clarify under what circumstances businesses may deduct meals and entertainment provided for the benefit of employees, if at all.
Food and beverage expenses that are for business purposes that are not lavish or extravagant under the circumstances are generally deductible and subject to a 50% limitation. Prior to the TCJA and these final regulations, one exception to this rule was meals provided to employees for the benefit of the employer. Meals provided under these circumstances were 100% deductible. For example, pizzas provided on snow days so the sales department could remove snow from the lot were 100% deductible. Now, unless these expenses are included in employees’ wages, they are subject to the 50% limitation. Similarly, snacks provided in a breakroom used to be 100% deductible, now they are also subject to the 50% limitation. Snacks provided in the service waiting area for customers are still 100% deductible.
Generally, any expense incurred by a business for purposes of entertainment, amusement or recreation is not deductible, even if provided for business purposes. So for example, similar to suites provided at sporting events, dealerships that provide tickets to concerts or run sales contests and send employees on trips, can no longer deduct these expenses. There was some confusion about whether the cost for food and beverages were included in the definition of entertainment. The final regulations clarify that entertainment does not include food and beverages, unless provided at or during an entertainment activity and not separately stated in the cost of the event. Food and beverage costs separately stated where there is a bonafide business purpose to the event are eligible as a business expense. Also not included in the definition of entertainment are costs primarily for the benefit of employees, such as holiday parties that don’t include customers, and similar activities.
Regardless of whether food and beverage or entertainment is partially or wholly deductible, if the cost is included in an employee’s W-2 taxable wages, the expense becomes deductible to the dealer as compensation expense. In order to comply with the new final regulations and TCJA, dealers should take time to understand these rules and establish accounts for the purpose of tracking deductible meals and beverages and non-deductible entertainment. Tracking these expenses will help ensure compliance with the new final regulations and assist with documenting and proving deductions taken on the dealership’s tax return.
by Barton Haag, CPA