FAQ: New rules for meal, travel and entertainment deduction

Closeup dining tableThe Tax Cuts and Jobs Act (TCJA) amended Section 274 to change the rules for deducting certain types of meal, entertainment and travel expenses. The changes affect only a narrow group of expenses, but they can represent large deductions for taxpayers. In addition, because Section 274 divides meal, entertainment, and travel expenses into so many different categories, it can be difficult to determine which costs are deductible, partially deductible or not deductible at all.

The following information answers some frequently asked questions on the changes, and provides insights and next steps for taxpayers implementing the changes. Unless otherwise provided, the answers apply to expenses incurred after Dec. 31, 2017.

What has changed for meal expenses? TCJA repeals the exception that provided a full 100% deduction for food or beverages excludable from employee income as a de minimis fringe benefit under Section 132(e). These costs are now subject to the general 50% limit on deducting meals.

Grant Thornton Insight: The previous full deduction for meals described in Section 132(e) generally applied to a cost that, by its nature, is so small as to make accounting for it administratively impracticable. Unless the IRS issues rules of convenience in future guidance, companies will face the challenge of quantifying these costs and deducting only 50% of the expense.
What happens to meal expenses in 2026? If the law is not amended, then no deduction would be allowed for any expense incurred after Dec. 31, 2025, for:

  • The operation of an eating facility described in Section 132(e)(2)
  • Food or beverages associated with such facility (including expenses under Section 132(e)(1) relating to de minimis fringes)
  • Meals for the convenience of the employer described in Section 119(a)

Grant Thornton Insight: This change will reverse taxpayers’ preference for how meal costs are characterized. Costs that used to be eligible for a favorable exception from the 50% limit prior to 2018 are not only losing the full 100% deduction, but will not be eligible for any deduction beginning in 2026. It should be noted the statutory construction of this legislative change is not completely consistent. The provision reducing the 100% deduction to 50% in 2018 applies to all de minimis fringe benefits under Section 132(e). The complete disallowance of the deduction in 2026 only applies to de minimis fringe benefits associated with an employer facility, so that other meals qualifying for a de minimis fringe could still potentially qualify for a 50% deduction.
Are any meal expenses still eligible for 100% deduction? Yes. TCJA only repeals the de minimis fringe benefit exception discussed from the 50% meals limit, and does not affect meal costs qualifying for other general exceptions offering a 100% deduction under Section 274(e):

  • Expenses treated as compensation
  • Reimbursed expenses incurred in connection with performance of services (for example, in a situation where an employee incurs expenses and is reimbursed by an employer, this exception applies to the employee, not the employer)
  • Recreational expenses for employees
  • Items available to the public
  • Entertainment sold to customers
  • Expenses includible in income of persons who are not employees

Are there changes to deductions for meals already subject to the 50% limit? Generally, costs for food and beverages that previously qualified for a 50% deduction still qualify for a 50% deduction, such as employee meals on business travel. However, changes to the rules for deducting entertainment expenses could impact business meals (such as meals with clients, customers, or business contacts) depending on the interpretation of the statute. The IRS has issued interim guidance, discussed below

Are business meals still deductible or are they considered entertainment? What about when the meals are associated with another entertainment activity? Under interim guidance released by the IRS (Notice 2018-76), which taxpayers can rely on until regulations are proposed and made effective, food and beverage expenses for business meals may still be deductible under certain circumstances. Taxpayers may deduct 50% of an otherwise allowable business meal expense if the following five requirements are met:

  • Expense must be considered an ordinary and necessary business expense under Section 162
  • Expense cannot be lavish or extravagant
  • The taxpayer or an employee must be present
  • Food and beverages must be provided to a current or potential business customer, client, consultant or similar business contact
  • Food and beverages must be purchased separately from any entertainment activity or the cost of food and beverages must be state separately from the cost of entertainment (cannot be circumvented through inflating the charge for food and beverages)

What has changed for entertainment expenses? TCJA disallows any deduction of costs for activities considered entertainment, amusement or recreation under Section 274(a). Previously, Section 274 generally allowed taxpayers to deduct 50% of the costs of entertainment, amusement or recreation that is directly related to (or, in certain cases, associated with) the active conduct of a taxpayer’s trade or business, with certain limitations on tickets, sky boxes and clubs.

Are any entertainment expenses still deductible? Yes. TCJA does not affect the 100% deduction available under Section 274(e)(4) for recreational, social or similar activities (including facilities) expenses primarily for the benefit of employees. Entertainment that qualifies under other general exceptions under Section 274(e), such as expenses treated as compensation, items available to the public or entertainment sold to customers, is also still eligible for a 100% deduction. TCJA does not affect expenses that are not considered entertainment, for example the cost of a hotel room for an employee on business travel.

What has changed for transportation expenses? TCJA disallows any deduction for providing a qualified transportation fringe benefit to employees, and, except as necessary for ensuring the safety of an employee, any expense for providing transportation for commuting between an employee’s residence and place of employment. The deduction for other kinds of transportation expenses, such as flights for employee business travel, has not changed.

Grant Thornton Insight: TCJA did not define the term “employee’s residence” or “employee’s place of employment.” Future guidance from the IRS defining these terms will impact the scope of this change.
For more information contact: Dave AuclairDave Auclair
Managing Principal, Washington National Tax Office
T +1 202 521 1515

Debbie ShiDebbie Shi
Manager, Washington National Tax Office
T +1 202 521 1501

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