A long time practice in the hospitality industry is to provide employees with meals during their shifts for both the benefit of the employee and employer. Employee meals are a cost of doing business in the industry and are a business deduction for the employer. A recent tax law change will soon decrease and eventually eliminate the benefit for the employer.
In late December 2017, Congress passed and the President signed the Tax Cuts and Jobs Act. The law will phase in a wide variety of changes to the way businesses calculate their tax liabilities — some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall in the latter category.
Before tax reform, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.
Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be completely nondeductible. Often, meals and entertainment expenses are recorded to the same account for accounting purposes. Due to the new law, it might be beneficial to separate your meal expenses from your entertainment costs beginning in 2018.
The change in tax deductibility of these costs not only impacts your business from an employer perspective—analysts are looking at how these new limitations may impact how businesses look to limit these costs which could also impact your revenue. Although we hope there will not be a negative impact to the hospitality industry, only time will tell.
Due to the nature of the industry, employee meals might not be a benefit that you wish to take away from your employees and it may not affect your bottom line for accounting purposes, but it will have an effect on your tax liability. If your business regularly provides meals to employees, let us assist you in anticipating the changing tax impact.
Contact Tax Manager Patrick Wilson, CPA via e-mail or phone (812.670.3461) for more information.