Historically, most meals and entertainment expenses have been 50% deductible for tax purposes, other than a few exceptions. Under the new tax reform, expenses associated with entertainment will no longer be deductible. Most food and beverage expenses will remain 50% nondeductible, but some items that have previously been 100% deductible will now be subject to 50% as well. These expenses include meals provided for the convenience of the employer, meals that are provided for a small or no charge on the site of the employer, and company cafeteria expenses. Both of these expenses are set to become fully nondeductible in 2026.
There are still some meals and entertainment expenses that will remain fully deductible. These include any expenses related to recreational or social activities that benefit employees. Examples include company holiday parties or annual picnics.
Businesses should begin to make changes to the procedures used to tracking these expenses. Not only will it save time at year-end, but could ensure that the maximum deduction is taken.
Changes will affect fringe benefits as well. The cost of employee parking and transit passes will still be excluded from employee income, but now the employer will be unable to deduct the expense. Reimbursement for moving expenses and bicycle commuting will no longer be excludible from employee taxable income. However, both exclusions from employee income will resume again in 2026.