Welcome to Kreischer Miller’s Tax Season Construction Series, a four part in-depth look at the changes in the Tax Cuts and Jobs Act that affect businesses in the construction industry. Our first article examines the new rules for meals and entertainment tax deductions. In the coming weeks, we’ll explore topics related to depreciation, Section 199A, and construction accounting methods.
For a high-level summary of the Tax Cuts and Jobs Act and how it applies to the industry, download our Tax Planning Opportunities for the Construction Industry whitepaper here.
The Tax Cuts and Jobs Act (TCJA) enacted in December 2017 contained numerous provisions, some of which had implications for certain types of taxpayers or industries, and others which had broad application but are particularly relevant to construction companies. One of these latter changes involves Federal income tax deductions for meals and entertainment costs incurred after December 31, 2017.
Meals and Entertainment Deductions Before the TCJA
A little background about the rules prior to the TCJA may be helpful. Historically, there has been a tension in the tax code for expenditures that could be viewed as having both a business purpose as well as personal benefit. Travel costs for business (e.g., airfare, hotels, cabs) have generally been viewed as relatively safe ground, provided taxpayers can satisfy basic recordkeeping requirements to establish the business relationship and document the amount of the expense. On the other hand, costs incurred for meals and entertaining customers and employees have been viewed as having some personal benefit.
Provisions in the tax code addressed this situation by placing limitations on the tax deduction for meals and entertainment. Prior to the TCJA, only 50 percent of costs associated with entertaining customers and employees were permitted as a tax deduction. Costs associated with entertainment facilities (e.g., rental fees for a sports luxury box) were not deductible at all. The cost of meals (e.g., dinner while traveling for business) were also subject to the 50 percent deduction limitation. However, some meal costs (e.g. a company holiday party) escaped the limitation provisions and were fully deductible.
Some of the Rules Have Changed Under the TCJA
In general terms, the TCJA provides favorable tax benefits to businesses and individuals, although as with most tax legislation, there are winners and losers. Entertainment expenditures fall into the latter category. For entertainment costs incurred after December 31, 2017, no tax deduction will be allowed. Meal costs generally remain subject to the same rules that existed prior to the TCJA, with some notable exceptions either becoming immediately effective or coming into play after 2025.
This chart illustrates various types of meal and entertainment expenditures, with a comparison of their tax treatment before and after the December 31, 2017 effective date of the TCJA.
A few noteworthy takeaways relating to the new rules:
- The rules have not changed the requirement for taxpayers to substantiate both the amount of the expense for which a deduction is sought as well as the ordinary and necessary relationship to the taxpayer’s business.
- If an employer’s reimbursement to an employee is not supported by appropriate documentation collected in a timely manner, the amount will be treated as taxable compensation to the employee.
- Reimbursements treated as taxable compensation to an employee will be 100 percent deductible by the employer. However, under the changes made by the TCJA, the employee will no longer qualify for an employee business expense itemized deduction on his/her tax return.
- There will now be an important distinction between a cost that qualifies as a 50 percent deductible business meal and a potentially nondeductible item. In order to qualify for the 50 percent deduction:
- An employee of the business must be directly involved with a customer or with other employees when the cost is incurred,
- Business matters must be discussed, and
- The cost of the meal must be established separately from any related entertainment costs by appropriate documentation.
For example, in order for a meal-related cost to be 50 percent deductible when incurred in connection with a sporting event, some level of business discussion must occur between an employee of the business and a customer or other employee. And, the cost of the meal must be clearly documented separately from the event’s admission price.
The new rules for tax deductions on meals and entertainment expenses have prompted numerous questions from our construction industry clients. If you have questions or would like to discuss how these rules may apply to your business, please contact us.
Look for part two in our Tax Season Construction Series – a guide to depreciation – coming soon!
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.