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New Limitation On Meals And Entertainment Deductions Could Lead To More SEP IRA And 401(k) Plans

Pretty much since 1986, businesses have been able to deduct 50 percent of business-related entertainment and meal expenses.  Furthermore, meals provided by an employer to employees on its premises have been fully deductible.  In addition, qualified transportation fringe benefits, such as work-related parking costs have been deductible to the employer.  Much of this is expected to change under the Tax Cuts and Jobs Act (the “Act”).


The Act eliminates deductions for entertainment, amusement, recreation expenses, and membership dues.  Though meal expenses associated with operating a business, such as meals during employee travel, remain deductible subject to the fifty percent limitation.  The Act also disallows deductions for qualified transportation fringe benefits.  The reasoning behind the elimination of these deductions is that businesses will see their tax rates reduced under the Act, so the elimination or reduction of these deductions are only fair.  In other words, the elimination of these deductions helped pay for the reduction in the business tax rates.

Additional IRS guidance on this subject is expected, however, below are a few examples of how the Act may impact businesses and their employees:

  • Cost of taking a client to dinner before a baseball game would not be deductible. Prior to the Act, the expense would be partially deductible.
  • Cost of employee lunch on premises will be partially deductible, subject to the fifty percent threshold. Prior to the Act, the expense was fully deductible.
  • Cost of providing parking passes to employees at garages near their office would not be deductible. Prior to the Act, the parking cost would have been fully deductible.

The elimination or reduction of many business expenses for employee meals and travel under the Act could certainly lead employers to search for deductible expenses that will also benefit employees.  Enter employer sponsored IRAs, such as the SEP and SIMPLE IRA, and 401(k)

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