Employers should prepare for significant changes to the deductibility of meals and entertainment expenses beginning in 2026, including the elimination of certain deductions and the need to identify expenses that remain partially or fully deductible.
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The deduction for meals and entertainment (M&E) expenses has been one of the most broadly applicable opportunities for significant tax savings; however, the Tax Cuts and Jobs Act of 2017 (“TCJA” or “the Act”) used this deduction as a “pay for” to offset the tax reductions in the Act. Starting in 2026, these deductions will be significantly limited, and there are some misconceptions regarding how to apply the rules and what opportunities remain.
Under prior law, the Internal Revenue Code stated that a taxpayer could only deduct 50% of M&E expenses unless certain exceptions applied. The TCJA sought to further limit the deductibility of some meals and most entertainment expenses. Post 2025, the deductibility of many popular employer-provided fringe benefits, such as deductions for work-related activities including certain meal and entertainment expenses, has undergone sweeping changes and now may be fully disallowed.
However, some important exceptions still apply. Now more than ever, employers need to understand their M&E expenses and ensure they are properly categorized and deducted to avoid missed tax savings.
After 2025, the TCJA completely eliminates the employer tax deduction for on-site meals provided for the convenience of the employer at an employee-operated eating facility.
According to IRC Section 274(o)(1) and (2):
“Meals Provided at Convenience of Employer – No deduction shall be allowed under this chapter for — (1) any expense for the operation of a facility described in Section 132(e)(2), and any expense for food or beverages, including under Section 132(e)(1), associated with such facility, or (2) any expense for meals described in Section 119(a).” [Emphasis added]
(e)(2) Effective Date for Elimination of Deduction for Meals Provided at Convenience of Employer — The amendments made by subsection (d) shall apply to amounts incurred or paid after December 31, 2025.
There has been a lot of discussion in the tax community regarding whether to now include food and beverages provided to employees through an eating facility, as well as other employer-provided “de minimis” food and beverages at the workplace (such as coffee and donuts, working meals, and overtime meals). We believe the phrase “associated with such facility” is key in determining whether business meals and fringe-benefit food and meals not associated with the employee-operated eating facility may continue to be treated as a 50% deductible meals expense.
In the meantime, taxpayers can mitigate this loss of deduction by utilizing certain enumerated full deductions listed as exceptions in Section 274(e).
Companies should proactively review the tax treatment of their M&E expenses to determine whether the exceptions to the limitation rules will enable the taxpayer to treat certain expenses as 100% deductible—or whether these expenses are 50% deductible under the law change. Companies can review current and open tax years to take advantage of favorable M&E tax rules as well as higher rates for tax savings. A review like this now will help companies better understand their chart of accounts, process, and expense reporting system, which will make implementation of the new M&E rules much more efficient.
Companies should review the tax treatment of their M&E expenses to realize the exceptions to the limitation rules so that they can identify expenses that should be treated as 100% deductible.
Examples of fully deductible expenses include:
Expenses treated as employee compensation
Reimbursed expenses
Expenses for recreational, social, or similar activities primarily for the benefit of employees
Expenses for goods, services, and facilities made available by the taxpayer to the general public
Expenses for goods or services that are sold by the taxpayer in a bona fide transaction for an adequate and full consideration
Expenses includible in income of persons who are not employees
Whether considering the tax treatment of M&E expenses for 2025 and earlier or evaluating how tax reform will affect your deductions in 2026, statistical sampling is an effective and efficient way to understand your tax position and recognize savings. Companies can efficiently increase earnings per share, decrease their effective tax rate, and increase cash by incorporating these rules into their accounting policies; they may also non-intrusively segregate nondeductible or 50% deductible expenses from 100% deductible expenses to help minimize income taxes.
Ryan’s M&E and sampling professionals have decades of experience in designing and evaluating statistical samples, allowing taxpayers to substantiate tax positions that would be too time-consuming or costly to make under a full population review. Our experienced team partners closely with clients to reduce their income tax burden while ensuring compliance. Contact us to schedule a review with one of the professionals listed below.
The material presented in this communication is intended to provide general information only and should solely be seen as broad guidance and not directed to the particular facts or circumstances of any individual who may read this publication. No liability is accepted for acts or omissions taken in reliance upon the content of this piece. Before taking (or not taking) any action, readers should seek professional advice specific to their situation from Ryan, LLC or other tax professionals.
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