Tax reform law commonly referred to as H.R. 1 Tax Cuts and Jobs Act of 2017 has changed the deductibility of certain meals, entertainment and transportation expenses. Prior to 2018, a taxpayer could deduct 50 percent of business meals and entertainment and 100 percent of meals provided through an in-house cafeteria or meals provided for the convenience of the employer (i.e., de minimis fringe benefit). Under the new law, effective January 1, 2018, entertainment is no longer deductible and meals provided through an in-house cafeteria or for the convenience of the employer are subject to the 50 percent limitation. For tax years after 2025, meals provided through in-house cafeteria or for the convenience of the employer will not be deductible at all. No change was made to the rule allowing a 50 percent deduction for business meals and a 100 percent deduction for expenses incurred for recreational, social, or similar activities (including facilities, but not club dues) primarily for the benefit of employees (other than employees who are highly compensated employees).
Planning tip: Maximize tax deductions and save time on tax preparation by setting up separate general ledger accounts for business meals (50 percent deductible), entertainment (nondeductible), and recreational/social employee expenses (100 percent deductible).
The new law addresses transportation two times. It disallows a deduction for the expense of any qualified transportation fringe benefit provided to an employee of the taxpayer. Qualified transportation fringe benefits include transportation in connection with travel between the employee’s residence and place of employment, any transit passes and qualified parking. Qualified parking means parking provided to an employee on or near the business premises of the employer or on or near a mass transit station. The new law later goes on to say no deduction is allowed for any expense incurred for providing any transportation to an employee of the taxpayer in connection with travel between the employee’s residence and place of employment, “except as necessary for ensuring the safety of the employee.” No guidance has been provided to clarify the meaning of this “safety” clause.
Planning tip: If an expense is incurred to provide any transportation to an employee in connection with travel between the employee’s residence and place of employment to ensure the safety of employees, document these safety reasons to substantiate your deduction for these expenses.
