Post Tax Reform Rules for Deducting Business Travel, Job Relocation, Meals and Entertainment: What can I Expense?
By Michael Greenwald, Partner, Tax & Business Services & Michael Pace, Senior Manager, Tax & Business Services
The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated the entertainment deduction but kept the deduction for travel expenses generally intact. Major changes to business meal expense deductions were initially introduced by the IRS without providing clear and comprehensive guidance, leaving business owners uncertain about what can be deducted against earned income. Proposed regulations were released on February 21, 2020. A taxpayer may rely on the proposed regulations and/or rely on interim guidance until the regulations are finalized. Read on for a breakdown of key takeaways from the TCJA changes and how they may impact you.
- Prior to 2018, unreimbursed employee travel expenses were deductible as miscellaneous deductions subject to a 2% adjusted gross income (AGI) limitation on the employee’s personal income tax return, Form 1040. Typical unreimbursed expenses such as hotel costs, airfare, parking, mileage, and rental car fees were allowable deductions until TCJA suspended 2% miscellaneous deductions through 2025.
- Businesses and self-employed individuals can still deduct eligible travel expenses on their business return or Schedule C.
- Employers should consider the negative impact that the new rules have on their employees’ bottom line and review their existing travel reimbursement policy or evaluate the pros and cons of establishing one.
- The deduction for moving expenses associated with permanently relocating for a new job (i.e. moving household goods, personal effects and lodging) has been suspended through 2025 for all nonmilitary taxpayers. There are certain exceptions for spouses and dependents of active duty military personnel.
- Any reimbursement received from an employer for the cost of moving is considered to be a fringe benefit and taxable income to the employee.
- A business can still deduct the amount paid to an employee for job relocation; however, only members of the Armed Forces on active duty can deduct moving expenses on Form 3903 of their personal income tax return.
- Self-employed individuals can still deduct moving expenses related to business assets.
Meals & Entertainment Expenses under the Proposed Regulations
Since 1986 Congress has considered business meals to be a form of entertainment, but as long as a bona fide and substantial business discussion took place, both business meals and entertainment expenses were deductible at 50% of the total cost. TCJA amended sections of the Internal Revenue Code to completely disallow deductions for entertainment, amusement, or recreational expenses but other Code sections still allow a deduction for business meals. The confusion and uncertainty surrounding this topic forced the IRS to issue interim guidance.
Fortunately, the proposed regulations generally apply the guidance to all food or beverages, including travel meals, employer-provided meals, and meals provided to both employee and non-employee business associates at an entertainment event. The proposed regulations also provide that the term “entertainment” does not include food or beverages unless the food or beverages are provided at or during an entertainment activity and the costs of the food or beverages are not separately stated from the entertainment costs.
The five criteria below from the guidance must be met in order to claim a deduction for business meals:
- The expense is ordinary and necessary in carrying on any trade or business
- The expense is not lavish or extravagant
- The taxpayer or employee of the taxpayer must be present
- Food and beverages are provided to a business associate which means a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business (i.e. taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective)
- Food and beverages are purchased separately from the entertainment activity or separately stated from the cost of entertainment on the invoice, bill, or receipt. Inflating the amount charged for food and beverages is not allowed
The last item from the above list creates an additional layer of recordkeeping for taxpayers to be mindful of. If you are attending a sporting event, recreational event, or similar entertainment activity, business owners or employees incurring the expense must be careful when purchasing tickets with food and beverage built-in to the purchase price. Allocating the total cost between the ticket value and food and beverages costs will result in the entire amount being treated as a nondeductible entertainment expenditure. Structuring the itemization of the bill in advance with the event organizer or sales representative will help preserve and substantiate valid deductions for your business.
When Business Meals are 100% Deductible
Under the proposed regulations, the 50% deduction limitation now generally applies to all food and beverages, whether characterized as meals, snacks, or other types of food or beverage items, regardless if treated as a de minimis fringe benefit or not – unless one of the exceptions below applies.
- The taxpayer treats food and beverage expenses as compensation to their employee, or for persons who are not employees, the expenses are includible in their gross income for services rendered or as a prize award.
- For food or beverage expenses incurred under a reimbursement or expense allowance arrangement, the 50% limitation will apply to either the person who makes the expenditure or to the person who actually bears the expense, but not to both persons.
- Recreational, social, or similar activity for the benefit of the taxpayer’s employees. Company holiday parties, annual picnics, summer outings are allowed as long as the activities do not discriminate in favor of highly compensated employees, officers, shareholders or others with a 10% or greater interest in the business.
- Food or beverages made available to the public.
- Any expense for food or beverages that are sold to customers in a bona fide transaction for full and adequate consideration.
If you have questions about the effect of the new regulations on your business or personal taxes, please contact Michael Greenwald, Partner, Tax & Business Services.