Through December 31, 2017, most employer expenses related to meals, entertainment, and employee transportation were considered legitimate business costs, but might have been subject to 50% deductibility for federal income tax purposes. The new tax law reduces or eliminates many of those deductions. The IRS has yet to issue guidance on the new rules so the ideas below may be modified once that is issued. Our primary recommendation now is to keep track of each category of meals your co-op pays for so that the correct treatment can be applied on the 2018 return. The following changes take effect as of January 1, 2018, except as noted:
Most all of the expenses that were previously 50% deductible under the category of “entertainment” are no longer deductible at all. Three examples:
- If you have a business meeting at a sports event the cost of tickets, refreshments, parking and transportation will not be deductible.
- If you have a business meeting which ends with a professional entertainer, meal, and an open bar the costs of the entertainer, event staff, meal, and alcohol will not be deductible.
- A business discussion with a client, referral source or others at a restaurant also appears to be covered by the new rules and will not be deductible.
Some entertainment expenses remain fully deductible, including:
- Certain entertainment expenses for goods, services, and facilities that are treated as compensation to employee-recipients.
- Expenses for recreational, social, or similar activities and related facilities primarily for the benefit of employees who are not highly compensated – for example, holiday parties and picnics.
- Expenses for entertainment sold to customers.
Meals for employees travelling for business are expected to continue to be 50% deductible.
Employer Provided Meals
Under previous tax rules employer meals provided to employees on site were 100% deductible. This included:
- Meals that are excludable from an employee’s income because they are provided to employees for the employer’s convenience and on the employer’s business premises.
- Food, beverage, and facility expenses for meals that are considered a de minimus fringe benefit.
Starting January 1, 2018 these move to 50% deductibility.
After December 31, 2025 these will not be deductible.
These rules were likely aimed at things like the gourmet Google cafeterias but also apply to food co-ops and restaurants feeding employees.
Our suggestion for 2018 is to keep track of each type of meal so it can be readily categorized correctly when it comes time for 2018 tax preparation. Note that fiscal year groups should start this categorization on January 1, 2018 since that is the implementation date.
Accounts, sub accounts, or other methods of totaling these should be used:
- Employee meals at restaurants while travelling (likely 50% deductible)
- Business meals with clients, referral sources, or other networking at restaurants (likely 0% deductible)
- Business meals with clients, referral sources, or other networking at the business premises (likely 50% deductible)
- Board, member, or staff business meetings with meals at the business premises (likely 100% deductible)
- Board, member, or staff business meetings with meals at restaurants (likely 50% deductible)
- Cost of meals provided at a business location to employees (likely 50% deductible)
- Any of the meetings in 3, 4, and 5 where there is entertainment, open bar, spouses attending, or other aspects not related to conducting business (likely 0% deductible)
Transportation and Commuting Benefits
Previously certain commuting benefits and parking costs could be reimbursed or were tax free fringe benefits.
Starting January 1, 2018 an employer cannot deduct expenses for any transportation fringe benefits such as van pools, transit passes, qualified parking, and bicycle commuting.
An employer also cannot deduct expenses for providing any transportation, or any payment or reimbursement, to an employee in connection with travel between the employee’s residence and place of employment, except as necessary to ensure the employee’s safety.
Expenses for van pools, transit passes, and qualified parking can be excluded from employee compensation up to $260 per month. Any value above this must be added to employee compensation.
Expenses for bicycle commuting cannot be excluded from employee compensation regardless of the amount.
If the value of the benefit for van pools, transit passes, or qualified parking is in excess of $260 or for any bicycle commuting benefit, the amount is taxable to the employee and not deductible for the employer.
These fringe benefit rules are outlined in detail in IRS Publication 15-B.
In areas where parking is generally free there is no value assigned to the parking fringe benefit. In other places it is the arm’s-length value of such parking in the same or a similar location. The assignment of value to a parking benefit is the subject of IRS Notice 94-3.
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About the Author
Bruce Mayer, MBA, CPA currently serves as a Partner in the Assurance Department, working primarily on audits and tax returns of cooperatives, nonprofits, employee benefit plans and commercial businesses. Bruce performs audits of all kinds and provides consulting services on taxation of nonprofits and cooperatives. Bruce enjoys helping clients solve problems and providing clients advice on accounting and tax strategies that meet their needs.