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California’s “TCJA Lite” Avoids Decrease in Taxpayer’s Portion of M&E Deductions

In articles from earlier this year, we considered how the 2017 Tax Cuts and Jobs Act (“TCJA”) impacted certain transportation fringe benefits and how states had reacted to the new restrictions on meals and entertainment deductions. Previously, California had not yet taken a position on the TCJA, leaving in place its conformity with the Internal Revenue Code (“IRC”) of January 1, 2015, and its more taxpayer-friendly approach to these business expenses.

On July 1, 2019, Governor Gavin Newsom signed into law California Assembly Bill 91—or “The Loophole Closure and Small Business and Working Families Tax Relief Act of 2019”.

The good news for law and other professional service firms is that this California law adopted only a select few of the TCJA’s provisions and sidestepped its new limitations on meals, entertainment and employee transportation fringe benefits.

Absent from the new legislation is any reference to Section 274 of the IRC, the section governing meals, entertainment and fringe benefit deductions and, therefore, the earlier version’s more generous rules remain in place. These deductions—particularly for meals and entertainment—tend to impact professional service firms significantly because they are an essential component of their business development.

Expense

Federal Deduction

California Deduction

Dinner for employee working overtime (“working meals”)

 

50%

100%

Lunch with client where business is discussed or meals during business travel (“meals away from home”)

 

50%

50%

Entertainment event with client

 

0%

50%

Qualified transportation fringe benefits

(parking, transit passes or employee’s pre-tax election)

 

0%

(unless provided specifically for employee safety)

 

100%


To take full advantage of California’s more generous rules, taxpayers should consider maintaining separate accounts for these expense categories. Having the information readily available for tax reporting will simplify the application of the disparate federal and state rules. For questions regarding California’s new tax law, speak with your trusted business advisor.

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Jeanne-Marie Waldman is a Senior Tax Manager with nearly 20 years of experience focusing on partnership and corporate taxation as well as state and local income tax compliance and consulting.

William Gentilesco is a State and Local Tax Group Director focusing on state and local income taxation and sales and use tax consulting.