The Deep Dive: Changes to Fringe Benefit Rules for Employers

Brandon CanganyBrandon Cangany, CPA
Senior, Tax Services
bcangany@sponselcpagroup.com

Each Thursday for the next few weeks, Sponsel CPA Group will present The Deep Dive, a closer look at individual aspects of the new tax reform and how they might affect you or your business.  Click here for last week’s column.

Business Deduction is Denied for Entertainment Expenses – The Tax Cuts and Jobs Act eliminates the 50% deduction for business-related entertainment expenses for amounts paid or incurred after December 31, 2017. Under the new law, no deduction is allowed for: (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues for any club organized for business, pleasure, recreation or other social purposes, or (3) a facility used in connection with any of the above items.

However, the restrictions on deducting entertainment expenses don’t apply to nine types of expenses listed in Code Sec. 274(e), including the following:

  • Expenses for goods, services and facilities that are treated as compensation to an employee on the employer’s income tax return and as wages of the employee for withholding purposes.
  • Expenses paid or incurred by the taxpayer, in connection with the performance of services for another person, under a reimbursement or other expense allowance arrangement, if the taxpayer accounts for the expenses to that person.
  • Expenses for recreational, social or similar activities (including related facilities) primarily for the benefit of the taxpayer’s employees, other than highly-compensated employees.

As a result of the tax law change, Sponsel CPA Group recommends that taxpayers set up an “entertainment” account (separate from their meals account) within their general ledger in order to capture the now non-deductible entertainment expenses.

Business Deduction is Limited for Employer Provided Meals – The new law provides that the 50% limit on the deductibility of business meals is expanded, for amounts paid or incurred after December 31, 2017, to meals provided through an in-house cafeteria or otherwise on the premises of the employer. Under prior law, these expenses were 100% deductible by the taxpayer. For tax years beginning after December 31, 2025, the new law will disallow an employer’s deduction for expenses associated with meals provided for the convenience of the employer on the employer’s business premises, or provided on or near the employer’s business premises through an employer-operated facility.

Business Deduction is Denied for the Cost of Providing Qualified Transportation Benefits – The new law provides that no deduction is allowed, for amounts paid or incurred after December 31, 2017, for the expense of a qualified transportation fringe benefit (e.g., parking and mass transit), but the exclusion from income for such benefits received by an employee is retained. In addition, no deduction is allowed for any expense incurred for providing any transportation, or any payment or reimbursement, to an employee of the taxpayer for travel between the employee’s residence and place of employment, except as necessary for ensuring the employee’s safety.

If you have any questions about tax reform changes, please call Brandon Cangany at (317) 613-7899 or email bcangany@sponselcpagroup.com.

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