Tax Reform Changes Meal & Entertainment Deductions

By now you’ve probably heard of a little thing called tax reform. The Tax Cuts and Jobs Act is the most significant change to tax legislation in 30 plus years. Its impact if far reaching for individuals and businesses alike. For some great resources on its impacts, go here.

One of the key provisions of the act is the change in deductibility of entertainment, meals and transportation fringe benefits.

What changed?

Before tax reform took effect, businesses could (in general) deduct 50 percent of business-related entertainment and meals. Qualified transportation fringe benefits were also deductible, as were employee meals provided by an employer on its premises for convenience.

Tax reform (you guessed it) changed all that. Here are a few of the changes:

  • Entertainment, amusement or recreation expenses, membership dues for clubs and expenses for facilities related to these items are no longer deductible. Meals consumed during these events remains at 50% deductible.
  • Employee meals provided by an employer on its premises are now only 50 percent deductible through 2025. After 2025, these expenses are no longer deductible. There are no changes to the 100% deductibility for holiday parties or similar social events for all employees.
  • Qualified transportation fringe benefits and some expenses related to commuting transportation for employees are no longer deductible.

So what do I do?

Here are a few tips:

  • Look at your bookkeeping procedures for your company. How will you capture expenses differently in 2018 and beyond?
  • Make sure you’re documenting and correctly tracking expenses. This impacts ALL expenses from January 1, 2018 on.
  • Review your expense reimbursement policies. There’s a pretty good bet that some of the language in there needs to change to comply with the new tax reform act. For a list of some of the questions we’ve encountered already, check out this article.

Ultimately, your course of action will vary based on your particular circumstances as well as updates from the IRS. If you have questions, ask your business advisor or CPA. The new tax reform act can be complicated, but we can help ensure your business is on track and maintaining your books correctly.

The Gift of Per Diem Rates

Business travel expenses are enough to make anyone’s head spin. There are so many things to remember, both for the employee traveling, as well as the business owner. There are the receipts and the records and the purpose of the travel … you can see how this begins to add up.

There is another option for business travel, known as per diem rates. Per diem rates are the daily fixed allowances employees are paid or reimbursed for work travel. These could include:

  • Lodging
  • Meals
  • Tips
  • Ground transportation
  • Other incidental charges (dry cleaning, wi-fi, etc.)

One thing per diem rates don’t cover is the cost of transportation to the work function or site. So if your employees are flying or driving, that’s paid separately by you.

Per diem rates are based on IRS-approved rates for your location. The General Services Administration issues these rates within the continental United States. They’re updated each year (check out the most recent update here).

So why use per diems? Well receipts usually aren’t required for per diem, meaning less paperwork. Another benefit of per diems is that qualified per diem reimbursements usually aren’t subject to income or payroll tax and therefore aren’t reported on an employee’s W-2.

But before you get all excited, here are some tips for implementing a per diem program that actually qualifies for tax-free reimbursements.

  • Is there a business purpose? Per diem rates are deductible when they have a purpose. In other words, the expenses your employees incur while traveling for work must be ordinary and necessary business expenses associated with travel away from home in connection with the performance of duties for a job, profession or business.
  • Are you away from “home”? Per diem rates only work when the employee is actually away from their tax home. The basic rule of thumb here is that per diem rates apply when the employee is away from home longer than an ordinary day’s work and reasonably could not be expected to make the trip home without obtaining sleep or rest. This is also known as the “sleep or rest rule.”

The establishment of a tax home is important. Temporary employees who hop around to different work assignments in various locations are not eligible for per diem rates. When in doubt, think about if the employee incurs substantial continuing living expenses related to their tax home location.

  • Is the assignment long term? Per diem allowances do not work for employee assignments that last over a year. In order for per diems to apply, the assignment has to have a definite period (beginning and end) and be documented.
  • Have you been keeping track? Yes, one of the benefits of a per diem allowance is the less stringent recordkeeping. However, documentation is still required. Typical documentation for per diems includes: days worked, location and business purpose.
  • Do you know the IRS-approved rates? The rates for per diem allowances differ based on location. If you pay over the location based amount, the excess will be classified as taxable income for your employee.
  • Are you giving breaks? Sometimes you put an employee at a job for multiple assignments. But what if that assignment lasts longer than a year? Make sure the breaks between assignments in the same location are legitimate. Typically, the IRS has said breaks of three weeks or less might not be considered a break at all. So pay attention to the length of contracts and the breaks between assignments.