Meals and no entertainment: Holiday parties, overtime dinners and pastries

By Dawn Wagenaar, Ingenuity Marketing Group, LLC

Good news: Your company can still have wild, crazy and fully deductible holiday parties under the new Tax Cuts and Jobs Act!

I wrote in a previous article the effects of the Tax Cuts and Jobs Act (TCJA) on the widely-used M&E deduction, under IRC Section 274.1 As the article explained, the TCJA has effectively eliminated the historically deductible entertainment expenses that were directly related to, or associated with, the active conduct of the taxpayer's business.2 This article will further explore the impacts of the amendments to IRC Section 274 and their effects on employee meals, holiday parties and other various exemptions and restrictions on M&E expenditures.

Looking at the prior law

Under the prior law, most meal and entertainment expenses were limited to a 50-percent deduction, so long as the expenses were: 1) directly related to the active conduct of a trade or business; 2) ordinary and necessary; and 3) properly substantiated. As previously mentioned, these expenses were generally limited to a 50-percent deduction, unless an exception applied.

IRC Section 274 laid out several exceptions to the limitation of a 50-percent deduction. These exceptions included:

  • Onsite meals provided to employees for the "convenience of the employer."4
  • De minimis food and beverages, including eating facilities operated by the employer.5
  • Meals or entertainment treated as compensation to employees.6  
  • Meals or entertainment included in income of a non-employee (e.g., a nonemployee director).7
  • Traditional recreational, social or similar activities for employees.8
  • Goods, services or facilities made available by the taxpayer to the general public.9

The exceptions listed above allowed for a full 100-percent tax deduction instead of being limited to a 50-percent deduction.

Under the current law

Changed items

The above list of exceptions to the 50-percent limit has been modified and slimmed down under the Tax Cuts and Jobs Act. Expenses for employer-operated eating facilities, which were once 100-percent deductible as "fringe benefits," are now limited to 50-percent deductible.10 Similarly, it appears that meals that are provided by an employer to an employee on the employer's premises for the "convenience of the employer" are also now limited to 50 percent instead of 100 percent.11  This provision change appears to override the argument of 100-percent deduction of meals provided to employees as a de minimis fringe benefit. This change may be in response to a case in which the IRS lost to the Boston Bruins, a National Hockey League team, arguing that the pregame meals provided to players and personnel should be subject to the 50-percent limitation and not fully deductible as a de minimis fringe benefit.12 CPAs across the country will lament this change, as the number of employer-provided pizzas during busy season may likely be cut in half. Further, both expenses described above will be nondeductible after Dec. 31, 2025.13

Remaining items

Although the Tax Cuts and Jobs Act has diminished the amount and types of deductions once available under the M&E deductions of IRC Section 274, there are several deductions that survived the cuts.  These continued deductions include:

  • Meals or entertainment treated as compensation to an employee.14
  • Meals or entertainment included in income of a non-employee.15
  • Traditional recreational, social or similar activities for employees (yes, this includes holiday parties).16
  • Expenses for goods, services and facilities made available to the general public.17

It will be very important for employers to keep track of these various categories of expense and differentiate them from the M&E expenses that have been either limited to a 50-percent deduction or have been completely eliminated. As the amount of M&E deductions has been severely decreased, the items that have retained a 100-percent deduction will be important to utilize.

Food for thought

Under the Tax Cuts and Jobs Act, the landscape of the M&E deduction has been recast. As this article discussed, the meals and entertainment deduction is now subject to additional restrictions and limitations. Although you can still deduct the full cost of providing pastries and coffee in your lobby to the general public, the meals you provide your employees for working overtime will now be subject to a 50-percent limitation or need to be included in their income. It is important that employers are aware of these changes and adopt adequate policies and procedures as of Jan. 1, 2018, to avoid any unwelcome tax effects. The good news, as a final reminder, is that holiday parties avoided the chopping block! It appears Congress is not a complete Scrooge. 

Andrew Seifert, JD is a tax consultant for Wipfli LLP, where he assists clients with complex tax issues, transactional advising and overall business consulting. In addition, Andrew frequently presents on tax-related matters. You may reach him at aseifert@wipfli.com or 651-766-2856.

  1. P.L. 115-97, Section 103304(a)
  2. IRC Section 274(a)(1)(A) as amended by H.R. 1 § 13304(a)(1)(A)
  3. IRC Sections 162, 274(a)(1)(A) and (d)
  4. IRC Section 119(a)
  5. IRC Section 132(e)(2)
  6. IRC Section 274(e)(2)
  7. IRC Section 274(e)(9)
  8. IRC Section 274(e)(4)
  9. IRC Section 274(e)(7)
  10. IRC Section 274(n)(2) as amended by H.R. 1 § 13304(b)
  11. Id.
  12. Jacobs v. Commissioner, 148 T.C. 24 (2017).
  13. H.R. § 13304(e)(2)
  14. IRC Section 274(e)(2)
  15. IRC Section 274(e)(9)
  16. IRC Section 274(e)(4)
  17. IRC Section 274(e)(7)