updated May 10, 2019
Tax changes that took effect last year now limit employers' ability to deduct employee entertainment events. But if businesses carefully navigate the new rules, exceptions allow them to continue deducting many employee meals and parties, at least in part.
How the Law Changed
Under the Tax Cuts and Jobs Act of 2017, meals with employees during which business is discussed are considered 50 percent deductible. If no business is discussed, the meal is not deductible and is fully taxable as entertainment. The IRS has stepped up scrutiny of deductions for expenses related to meals and events to ensure they're for legitimate business purposes and not for entertainment.
There are some significant exceptions to the taxing of meals and events, however, such as:
- The IRS excludes from taxes as "de minimis," meaning "a trivial cost," meals or meal money occasionally provided to employees, or meals or meal money provided when employees must work overtime.
- Food or beverage expenses for holiday parties, annual picnics and similar celebrations are not subject to the 50 percent deduction limit and remain fully deductible when provided primarily to benefit employees—and are not limited to those who are high ranking or highly compensated.
Subsidized meals served at an onsite cafeteria or similar facility are handled differently: The tax act reduced deductibility from 100 percent to 50 percent for meals provided at onsite eating facilities through Dec. 31, 2025. After that date, such costs will not be deductible.
The IRS issued guidance earlier this year clarifying that strict rules must be met to avoid taxes on free meals at work, although snacks get a pass. The IRS found that the value of snacks is small, even if offered continually. Therefore, snacks remain tax-free as a de minimis benefit.
What This Means in Practice
"It's important to remember that these rule changes do not completely eliminate the deduction for group events that serve a business need," said Dave Du Val, chief customer advocacy officer with audit services firm TaxAudit in Citrus Heights, Calif.
Du Val gave the example of corporate events that may appear to be for entertainment but help to strengthen business teams and build trust. "An argument could be made for the deductibility of the expense" in these cases, he said, although that's far less likley if team-building events include trips to fancy resorts.
"There is no black-and-white lettering on this subject, so a taxpayer has to look at all the facts and circumstances involved in each meeting to determine which category it falls under"—deductible or not—he added.
This view is shared by Vincenzo Villamena, managing partner of Global Expat Advisors, a boutique CPA firm with offices in New York City and Hong Kong. The ruling "has largely not affected company events, since they are still allowed to be deducted if for the sole benefit of the employees," Villamena said. Deductions for purchases related to client events, such as for sports tickets and stadium box seats, are not allowed.
Holiday Party Complications
Although employee holiday parties are fully deductible if they serve a clear business need—and most can meet that requirement based on their importance for employee engagement—the issue becomes trickier when there will be guests attending who aren't employees and their spouses or significant others.
Where a holiday party includes nonemployees such as a business owner's friends, customers, independent contractors, vendors or business associates, then employers can deduct 100 percent of the cost for employees (plus their spouses or significant others) but only 50 percent of the costs to the others who attend, Villamena explained.
In addition, events held at the worksite are less likely to create tax risks than offsite events, especially if the latter are held at locations or venues that might be considered lavish.
In some circumstances, employers may have to change their practices—and their guest lists—but they should not have to eliminate these events entirely from a tax liability standpoint.
[SHRM members-only Q&A: Are there any tax issues we need to be aware of when we give employees a gift card or other small gift?]
Don't Ignore Engagement
Organizations that are considering cutting back on employee parties and events that do not have a direct business purpose should consider how this might affect engagement and morale, said Jim Bell Sr., founder and CEO of advisory firm Abel HR in Cranbury, N.J.
Employees at Abel HR enjoy an offsite holiday party at a local country club and a summer barbecue at the office, he noted. The company holds the events to show appreciation for the hard work employees do throughout the year. "If employees don't feel cared for and appreciated, they will look for the door," Bell said.
If tax changes are an issue, Bell recommended scaling back on party extras and avoiding anything lavish. He suggested, for instance, that holding a Thanksgiving event, where employees bring a favorite family dish and tell the story behind it, can help employers connect with workers—and workers with one another—"in profound ways."
Lone Star Bloom, a retail florist with more than 35 locations in the U.S., flies all its workers to an in-person meeting once a year, said president Kyle Brown. "The benefit we receive from this in-person collaboration [is far more important than] any tax benefits or lack thereof," he remarked.
Brown acknowledged that, as a CPA, he is very numbers driven, but he added, "The changes in the tax law had no bearing on a decision whether to continue the events or not. In fact, we are contemplating moving to a semiannual meeting due to the success we achieve with our annual meeting."
Lin Grensing-Pophal is a freelance writer in Chippewa Falls, Wis.
Related SHRM Article:
The IRS Says Let Them Eat Snacks, SHRM Online, March 2019