tax reform: impact on oil & gas operations · uncertainty exists regarding unadjusted basis...

Tax Reform:Impact on Oil & Gas Operations

Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 2

Tax Reform

Legislative & Industry Updates

Copyright © 2018 Deloitte Development LLC. All rights reserved. 3

Legislative Update

Topic Observations

General Observations – 2017

Tax Reform Act (P.L. 115-97)

(“The Act”)

• Budget reconciliation was used as the process to move tax reform legislatively, which brought with it inherent advantages and disadvantages.

• Temporary nature of the individual tax provisions in particular may create planning challenges in the future.

• Future election results may drive changes to The Act even more quickly.

• Expedited timeline for passage of The Act will likely lead to further legislative and regulatory changes.

“Fixing” the new law – three

main paths

• Technical Corrections

• Must be truly technical (conforming changes, etc.) that reflect the clear intention of the drafters and the staff at the Joint Tax Committee.

• Generally must have sign off from Treasury, Joint Committee on Taxation, GOP Ways and Means, DemWays and Means, GOP Senate Finance Committee and Dem Senate Finance Committee, an unusually difficult barrier this time around.

• By definition, the items should not have any revenue impact, so therefore need a vehicle that can pass with at least 60 votes in the Senate.

• Substantive legislative fixes

• If they have a revenue impact, they could – in theory – be passed via budget reconciliation (and only 51 Senate votes); but that requires an FY19 budget resolution authorizing tax reconciliation, and that may not happen.

• Treasury guidance / rulemaking

• Treasury is likely to be highly motivated to provide the smoothest possible implementation; expect them to use their regulatory authority to the maximum extent possible.


Key consideration about the new Tax Act

What is the

impact on our

ability to use

attributes

(e.g., foreign

tax credits, net

operating

losses)?

What is

the impact

on our

effective

tax rate?

What factors

cause

effective

tax rate

volatility?

Does this

change the

way we think

about our

legal entity

structure?

What is

the impact

on our

cash tax

position?

How does this

impact our

treasury

considerations

and use of

cash overseas?

What impact

does this have

on our cross-

border

payments?

Do any of the

changes impact

our policies

around employee

compensation

and benefits?

How does

this impact

our M&A

strategy?

What

technology

changes are

needed to

accommodate

additional data

requirements?


Oil & Gas Overview

Historically targeted O&G specific provisions unchanged

Important items unchanged include:

• Deduction for intangible drilling costs• Percentage depletion• Recovery of geological and geophysical costs• Designation of certain natural resource-related activities as generating qualifying income under the publicly traded partnership (“PTP”) rules

• Exception to passive loss treatment for certain working interests

• LIFO


Description Prior Law The Act Considerations

Leasehold Costs

Costs to acquire O&G leases are generally capitalized and recovered through depletion (611).

Independent producer & royalty owner is allowed to use percentage depletion, and is generally allowed to deduct the greater of cost or percentage depletion.

TJCA does not specifically address O&G related leasehold cost rules.

Absent unanticipated changes, historical treatment of these costs continue.

Tax Reform – Oil & Gas Overview



G&G Costs Generally capitalized & amortizable over 24 months (167(h)).

Major IOCs amortize over 7 years.

Foreign G&G capitalized and recovered through cost depletion.

Not specifically addressed. Absent unanticipated changes, historical treatment of these costs continue.




Intangible Drilling Costs

Taxpayers may elect to deduct currently. If no election, recover through cost depletion.

If properly elected, taxpayer can make an annual election to capitalize some or all of the deductible IDC, which is recovered over 60 months (§

59(e)).

IOCs capitalize 30% & amortize over 60 months.

The deductibility of IDC has been retained under section 263(c).

Section 291(b) has been retained, reducing the amount of IDC that IOCs can expense by 30%.

Though corporate AMT has been repealed, § 59(e) capitalization

appears to be available to corporations.

The statutory language modifying the AMT rules did not remove current law § 59(e). This provision allows

annual flexibility in determining the amount of IDC that an E&P company capitalizes or deducts.




Marginal Well Credit

Producers may claim a $3-per-barrel credit (adjusted for inflation) for the production of crude oil and a 50-cents-per-1,000-cubic-feet credit (also adjusted for inflation) for the production of qualified natural gas.

Unchanged. Consider projections of credit for the 2017 and 2018 tax years.

Potentially $0.51/Mcf of qualified natural gas production in 2017.

Credit may be fully phase-out for oil and natural gas in 2018.

Enhanced Oil Recovery Credit

Taxpayers may claim a credit equal to 15 percent of enhanced oil recovery (EOR) costs.

Unchanged. Continue to file certifications with the state.




199 Deduction Up to 9% deduction for certain income attributable to domestic production activities.

The ACT repeals the DPAD for tax years after 2017.

199 repeal will impact most businesses.

Research andExperimentation(R&E) Expenditures

Section 174 provides an option to immediately deduct oramortize R&E relatedexpenses over 5years.

Unchanged existing rules would continue to apply; however, section 174 expenditures paid or incurred in taxable years beginning after Dec. 31, 2021, are subject to capitalization and amortization over 5 years for research conducted within the US and 15 years for research conducted outside the US.

Change applied on a cutoff basis.

With the repeal of corporate AMT, this credit could become more relevant for companies that could not historically benefit from the credit due to their AMT profile.

Consider interplay between expenses reclassified as Section 174 expenditures and expenses capitalized under Section 59(e).

These rules do not apply to expenditures for the acquisition or improvement of land, or for expenditures paid to ascertain the existence, location, extent, or quality of mineral deposits, including oil and gas.



Domestic Oil & Gas Operations

Tax Reform Considerations



TopCorporateRate

35% 21%

Also reduces the 80% Dividend Received Deduction (“DRD”) to 65%, 70% DRD to 50% (preserving 2017 effective tax rate from such dividends).

The reduction in the corporate rate is generally favorable to all corporate taxpayers.

The reduction in the corporate tax rate reduces the US federal income tax liability but also the value of tax attributes.

As many companies with global E&P operations often have significant excess FTCs due to the high tax rates in the foreign jurisdictions, the lowering of the tax rate in the U.S. may exacerbate this situation.

Flow-through portfolio companies to consider corporate vs. partnership treatment taking into consideration effective rates (including potential future change in law), deductibility of state income taxes, operational concerns, exit considerations, and impact on IRR.

Consider the consequences of the corporate tax rate change on ASC 740 items such as deferred balances.

Tax Reform – Oil & Gas Considerations



Pass-ThroughBusiness Income

Taxed at owner’s tax rate.

20% deduction for qualified business

income through 2025, limited to greater of

a) 50% of W-2 wages, or b) 25% of W-2

wages + 2.5% of the unadjusted basis,

immediately after acquisition, of all

qualified property.

Qualified business income (“QBI”) means

items of income, gain, deduction, and loss

with respect to a taxpayer's qualified

businesses (must be income effectively

connected with a US trade or business).

Qualified business income excludes:

• Specified investment-related items (e.g.,capital gains/losses, dividends, interest income).

• Reasonable compensation paid to the taxpayer.

• Guaranteed payments for services.

QBI includes dividends from a REIT,

patronage dividends from a cooperative,

and qualified PTP income, but generally

excludes investment-related gain,

deductions, or loss.

In the case of a partnership or a S

corporation, applies at the partner or

shareholder level.

Flow-through portfolio companies to consider corporate vs.

partnership treatment taking into account effective rates (including

potential future change in law), deductibility of state income taxes,

operational concerns, exit considerations, and impact on IRR.

For flow-through portfolio companies, certain partners may be

eligible for the reduced rate for QBI. This may require additional

reporting to be put in place as early as the start of 2018.

Consider the impact of leverage on the ability to manage the

income threshold exception.

Deduction is an adjustment reducing adjusted gross income

(“AGI”) to get to taxable income.

Consider impact of tax rate used to determine tax distributions.

Uncertainty exists regarding unadjusted basis calculation, including

whether depreciation is section 704(b) or tax, basis to be used for

assets acquired through a like-kind exchange or contribution, and

whether step-ups are included.

Consider potential restructuring of Management Co. with respect to

QBI activities (e.g., wages of employees incurred elsewhere in the

structure may need to be moved).




Net Operating Loss (NOL)

Available for 2-year carryback and 20-year carryforward.

Generally eliminates NOL carryback

and provides an indefinite

carryforward. Limits current

deduction to 80% of taxable income

(before the dividends paid deduction)

for losses arising after 2017. Unused

NOLs will be carried forward.

NOL from pre-2018 tax years may be able to offset 100%

of taxable income; however, NOLs generated in 2018 or

later will be subject to an 80% limitation. Need to balance

value of pre-2018 NOL vs. Post-2017 deductions.

Though corporate AMT is repealed beginning 2018, need to

consider implications of full expensing of IDC in final year

of AMT regime.

Many costs incurred in the upstream space historically

qualified as SLLs. No longer avenue to carryback 10 years.

In flow-through setting, federal effective tax rate of 4.2%

when 80% of taxable income is shielded by NOL (21% *

20% = 4.2%).

Consider proper treatment of valuation allowance for

companies with currently with a valuation allowance

against NOL DTA for financial reporting purposes.



The Act requires a US shareholder owning at least 10 percent of the vote of a foreign subsidiary (where there is at least one US corporation that is a 10 percent voting shareholder) to add to its subpart F income the shareholder’s pro rata share of the foreign subsidiary’s net post-1986 historical E&P, as determined as of November 2, 2017, or December 31, 2017, whichever is higher. This income is to be reported as of the foreign subsidiary’s last tax year beginning before 2018, and is taxed at one of two rates: (1) 15.5 percent for E&P held as cash or cash equivalents; and (2) 8 percent for all other E&P.

Should the § 965 dividend (net of the DRD) should be treated as taxable

income for all purposes?

Can any NOL pre- § 965 in 2017 can be elected to be excluded from the computation using the § 965(n)

election?




AMT Alternative regime that impacts many corporate and individual taxpayers with O&G investments. Special tax preference items for upstream taxpayers.

Corporate AMT after 2017 has been repealed.

Would continue to allow the prior year minimum tax credit to offset the taxpayer’s regular tax liability for any tax year.

Unused credits are refunded: 50% of remaining credit each year 2018-2021.

While AMT impacts O&G taxpayers in all sectors of the industry, it has historically been especially relevant for upstream companies due to the IDC preference item. No longer need to calculate.

Impact to financial statements with the release of the valuation allowance on use of credits.

Need for partnerships to still calculate Excess IDC and other AMT amounts as a result of individual AMT not being repealed.

How to maximize use of AMT credit against regular tax liability.

Need to maintain AMT and ACE books?




Tangible Cost

Recovery

Taxpayers generally

recover costs under

the Modified

Accelerated Cost

Recovery System

(MACRS).

Full expensing allowed in year one for

“qualified property” (generally tangible

personal property) placed in service

after September 27, 2017 and before

January 1, 2023. This provision is

phased down by 20% per calendar year

beginning in 2023. The phase down

begins in 2024 for assets with certain

longer production periods as well as

certain aircraft.

No “original use” requirement for the

property, but other limitations apply.

For qualified property placed in service

during the tax year ending after

September 27, 2017, taxpayers may

elect to utilize 50% bonus depreciation

as opposed to 100% bonus

depreciation.

The Act makes no changes to section

168(k)(7), which permits a taxpayer to

elect out of bonus depreciation on an

asset-class-by-asset-class basis.

Modeling:

• Update for immediate expensing of qualified property (generally new and used tangible personal property (i.e., not real estate), which may include purchase price allocable to such property in step-up transactions).

• Eligible to elect out of 100% expensing (reverting to either 50% or 0% expensing for 2017 and 0% for after 2017, then follow existing tax depreciation rules). If 100% deduction would result in an NOL, then further consideration may be advisable in order to evaluate whether 50% election (only in 2017) or electing out (0%) could be more beneficial than creating an NOL that would be limited going forward. However, residual depreciation post-2021 would reduce the interest expense limitation.

• Future “non step-up” acquisitions may result in little to no tax basis in property & equipment of acquired companies due to 100% expensing.

Could create additional ordinary income recapture in pass-through structure upon exit due to allocation of value to zero tax basis property.

Additional importance upon purchase price allocation methodology at acquisition and exit.

Mechanism to change existing assets to ADS is uncertain. The options are change in method, change in use, or change in useful life. It appears the intent was change in use, which generally requires prospective application.

The Act also repeals the ability to claim prior year minimum tax credits in lieu of bonus depreciation.

Consider impact to taxable income and optimizing FDII and GILTI deductions.




InterestExpense

Subject to certain limitations (e.g., certain related party interest), corporations may generally deduct interest expense.

Net business interest expense limited to 30% of

adjusted taxable income (“ATI”).

ATI is computed without regard to (i) the 20%

deduction for certain pass-through income, (ii)

the net operating loss deduction, and, prior to

2022, without taking into account depreciation,

amortization, and depletion. For 2022 and

after, ATI is computed with regard to

depreciation, amortization, and depletion

(EBITDA before 2022, EBIT thereafter).

Indefinite carryforward for disallowed amount.

The interest deduction limitation does not apply

if the taxpayer’s 3-year annual average gross

receipts does not exceed $25 million

(aggregation rules apply).

At taxpayer’s election, limitation does not apply

to interest of a real property trade or business.

If election is made, ADS depreciable life must

be used for real property.

For partnerships and S corporations, the interest

expense limitation is generally computed at the

entity level.

Modeling:

• The manner in which interest expense is classified in order to properly

allocate interest into business interest and investment interest

expense. This will require interaction with portfolio company.

• Post-2021, electing out of bonus depreciation to preserve the interest

deduction.

Significant additional reporting requirements for partnerships

Consider the value of a sale leaseback if the buyer is not subject to

interest deduction limitations but the seller is.

It is unclear how disallowed interest expense carryforward amounts under

prior section 163(j) are treated. Guidance is being sought.

Consider ability to use production payments designed to fail debt rules to

favorably impact amount of net interest expense.

Consider impact of making 59(e) election on IDC passed-through above

partnership which has interest limitation.

Consider tax efficiency of current debt and whether to change capital

structure to optimize after-tax cost of capital.



I.R.C. § 163(j)(7)(B)

For purposes of this paragraph, the term "electing real property trade or business" means any trade or business which is described in section 469(c)(7)(C) and which makes an election under this subparagraph.

I.R.C. § 469(c)(7)(C)

Real property trade or business. For purposes of this paragraph, the term "real property trade or business" means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.




Like-Kind Exchange

No gain or loss recognized forwide range of property held forproductive use or investment.

Different classes of propertyinclude (1) depreciable tangiblepersonal property; (2) intangibleor non-depreciable personalproperty; and (3) real property.

The Act limits the scope of like-kind exchangenonrecognition treatment to real property not heldprimarily for sale. Thus,personal property thatpreviously qualified fornonrecognition treatmentno longer qualifies underthe Act. The provisiondoes not apply to anyexchange where theproperty disposed of orreceived in the exchangeby the taxpayer wasdisposed of or receivedbefore December 31, 2017.

Many O&G companies routinely use like-kind exchanges in connection with acquisition and disposition transactions. Operating and non-operating interests in O&G reserves have generally qualified as real property under these rules, so these transactions should largely remain unscathed by the narrowing of this provision.

Any personal property included in the exchange, however, would not qualify. As it is common for a transaction to include a mixture of real and personal property, the value of like-kind exchange planning on prospective transactions will obviously be impacted by the amount of personal property included in a transaction involving both property types.




Technical Termination ofPartnership

Generally, a partnership terminates (and tax year ends) if, within a 12-month period, there is a sale or exchange of 50% or more of partnership profits and capital.

Technical terminations of partnerships are

repealed. Thus, a partnership would be

treated as continuing even if greater than

50% of the total capital and profits

interests are sold or exchanged; new

elections would not be required or

permitted.

The repeal is effective for partnership

taxable years beginning after

12/31/2017. As a result, partnerships

with non-calendar taxable years will

continue to be subject to the technical

termination rules for some portion of

2018.

Need to consider more carefully the selection of elections and methods of a new partnership.

Acquirers of a majority partnership interest should understand what elections and methods those target partnerships have in place, knowing that the acquisition itself would not create the technical termination and opportunity to choose new methods.

Creates additional purchase agreement considerations (e.g.,“straddle period” provisions for allocating partnership income as target partnership will not file a final pre-closing tax return).

Provides more flexibility on accrual of transaction costs in conjunction with closing the books or extraordinary items under section 706.

Modeling:

• Makes modeling an acquisition of existing partnership potentially more complex.

• Depreciation will no longer restart on MACRS property. Also, short year returns will no longer be required.

• No acceleration of certain income and adjustments (e.g.,deferred revenue and section 481(a) adjustments), which can have economic implications.




Executive Compensation

Code section 162(m) limitscorporate compensationdeductions for compensation paid to “covered employees” in excess of $1 million in a year.The limit includes exceptions for commissions and for“performance-basedcompensation” includingperformance-based bonus plans, stock options, and stockappreciation rights. Current IRS guidance defines “coveredemployees” as the CEO at theclose of the year and the threehighest-paid officers determined with reference to regulatory securities rules.

The Act expands the currentlimitation on deduction ofcompensation paid to “coveredemployees” under Code section162(m) by (1) eliminating theexclusions for commissions orperformance-based compensation,(2) expanding “covered employee” toinclude anyone serving as CFO orCEO at any point during the year, aswell as the three most highlycompensated officers as shown inSEC disclosures, and (3) providingthat status as a covered employeecontinues to apply if the person wasever a covered employee. The Actalso expands the definition of entitiescovered by the provision. The Act iseffective for tax years beginning after 2017, though it includes a transition rule for compensation paid pursuant to certain written binding contracts in place on November 2, 2017 which are not materiallymodified.

Companies may want to consider the impact of potentially lost deductions, identify situations where transition relief may apply, and reconsiderthe structure of compensation packages provided to covered employees. In addition, companies may want to consider the impact on deferred tax assets and the related income tax and financialaccounting implications.

Establish process for tracking “once covered employees” who are now “always a covered employees”.




Carried Interest

Taxed as long-term investment income.

Effective January 1, 2018, a three-year holding period is required to claim long-term capital gains with respect to certain partnership interests received in connection with the performance of services (“applicable percentage interests” or “API”).

No grandfathering for investments held prior to enactment.

Is carried interest arrangement less attractive for PE clients with new three-year holding requirement for LTCG treatment?

Consider the reporting and recordkeeping requirements that would be required by having API and non-API holders.

Consider modifications to LPAs to reduce impact of three-year holding period requirement.

Be mindful of outside basis limitations and holding period/section 731(a) gain.

Consider distributions in kind to the GP to the extent an asset being sold has a holding period greater than 1 year but less than 3 years.

Because the carried interest holding period rules do not affect the treatment of QDI, consider leveraged recapitalizations when there is sufficient E&P and basis to absorb distribution, subject to new section 163(j) and reduced corporate rates.

Consider potential fee waiver allocations and distributions.



Description Expense Type Prior Law The Act

Meals, Entertainment, and Fringe Benefits

Client entertainment 50% deductible 100% non-deductible (ND)

Client meals 50% deductible Entertainment related – 100% NDBusiness related - 50% ND

Cafeteria subsidy & convenience of employer meals

Mix of 100% deductible & income inclusion

Mix of 50% deductible & income inclusion. 100% ND post 2025

De Minimis meals (meals for employee meetings)

Mix of 100% & 50% deductible 50% deductible

Employee recreation Mix of 100% & 50% deductible Mix of 100% deductible & 100% ND

Overtime meals Mix of 100% deductible & income inclusion


Commuting fringe benefits


Mix of 100% ND & income inclusion

Skyboxes & suites Mix of 50% & 100% ND 100% ND



Description Expense Type Prior Law The Act

Meals, Entertainment, and Fringe Benefits (cont.)

Pre-tax Transportation

Employer could deduct pre-tax transportation benefit not subject to tax by employee (e.g., up to $260/month for parking and mass transit)

Employer cannot deduct pre-tax transportation benefit not subject to tax by employee

Moving Expenses Employer could exclude from income employer-paid or reimbursed moving expenses for employees

US tax reform has repealed the exclusion from income tax for employer-paid or reimbursed moving expenses for employees (with an exception for members of the armed forces on active duty).Beginning January 1, 2018, employers should include in income moving costs paid on behalf of employees as well as any reimbursement for bicycle commuting expenses




Tax Reform Considerations – Building sustainable processes for new tax law


Summary of Process Considerations

Tax AccountingImmediate need for revised calculations and reporting requirements.

Tax SystemsShort term need for technology support to meet new reporting requirements with pivot to longer term opportunity to enable sustainable processes for new calculations with expected emphasis on international and state calculations.

Data RequirementsNew tax law will change data needs in source ERP and other systems. Tax departments will need to inventory the needs and make appropriate changes to meet the new requirements. Clients will need to address these requirements in source financial systems, create new data models, and embed analytics for real time reporting.

Tax TransformationTax reform will add more momentum to the growing trend of alternative operating models andoutsourcing.



Tax Reform Considerations - Multistate


Interest Expense Limitation

• Increases AGI, so many states can be expected to follow.

• Applied at the entity level, therefore may impact the following:

− Entity level taxes

− Nonresident withholding

− Composite returns

• Carryforward of excess interest expense creates issues/opportunities because applied at the partner level.

• Immediate federal expensing – many states already decouple from bonus depreciation.

Pass-through Business Deduction

• State conformity to Internal Revenue Code (“IRC”) - Does state adopt the IRC “as currently in effect,” or as of a specific date that may lag new tax law?

• 20% domestic qualified business income (pass-through) deduction

− Does not reduce “Adjusted Gross Income” (“AGI”) so won’t impact states that start with AGI.

− States that start with “Taxable Income” may seek to decouple if deemed too great a revenue loss.

− Deduction applied at partner level, therefore may not impact the following:

◦ Entity level taxes

◦ Nonresident withholding

◦ Composite returns

Other State Conformity Items

• Transition tax:

− Individuals may not get dividend received deduction or subtraction for subpart F income.

− State may not spread transition tax over 8 years.

• GILTI.

• Repeal of technical terminations.

• ECI on the sale of a partnership interest.

• Carried interest.

• Business loss limitations.

• Compliance/potential additional disclosure.

Tax Reform Considerations – Multistate


Pennsylvania 100% Expense Decoupling: Corporation Tax Bulletin 2017-02

• Requires addback of federal 100% expensing deduction under section 168(k).

• But provides NO DEPRECIATION OR OTHER RECOVERY until the property is sold or disposed.

• Reverses prior policy of allowing full recovery of 100% bonus in the year placed in service.

• May result in PA corporate tax being greater than federal tax.

− Example assuming $20 million of qualified property for section 168(k) deduction and 100% apportionment:

• FTI of $10 million X 21% = $2.1 million federal tax

• PA income of $10 million + $20 million = $30 million X 9.99% = $3 million PA tax

State Modeling

• State corporate tax rates can be significant. Consider the following:

− Iowa = 12%

− Pennsylvania = 9.99%

− Minnesota = 9.8%

− Illinois = 9.5%

− Alaska = 9.4%

− New Jersey = 9%

− California = 8.84%

• Differences between individual rates and corporate rates can be significant – AK 9.4% difference, PA 6.92% difference, IL 4.55% difference.

• Entity-level taxes (including net income taxes) are levied on partnerships in certain states.

• State modeling is complicated, and should consider each of the following:

− States where business is operating

− States where owners reside

− Credits for taxes paid to other states

Application of Corporation Tax Bulletin 2017-02

• This is representative of the many nuances through which states adopt or decouple from federal rules, causing unforeseen results.

• Does not apply for personal income tax purposes, which decouples from bonus but allows a regular depreciation deduction.

• Partnerships may need to report different information for corporate vs. individual partners.

Tax Reform Considerations – Multistate (cont.)



Tax Reform Considerations – Financial Reporting


Financial statement reporting considerations about the new Tax Act

• Effect of change in law generally recognized upon

enactment, certain prospectively effective provisions

recognized once effective

• Existing deferred tax assets and/or liabilities must be

remeasured for new rate and rules in the period of

enactment

• Current year taxes payable/refundable—after effective date,

no earlier than period that includes enactment date

• Consider the effect of the change in law on the indefinite

reinvestment assertion

• SEC staff accounting bulletin No. 118 (SAB 118) provides a

measurement period of 12 months from enactment to

complete accounting*

1. Recognize amounts for which accounting can be

completed

2. Recognize provisional amounts where accounting is

incomplete

3. Incomplete accounting, no amount recorded

*FASB did not object to non-SEC registrants applying (SAB

118)



Appendix


Client Meal Examples

Type of M&EExpenditure

Old Law Deductibility New Law Deductibility

Meal to celebrate deal/project closing 50% deductible 100% non-deductible assuming the purpose is entertainment

Meal with substantiation of business purpose other than entertainment

50% deductible 50% deductible

Meal with no substantiation of business purpose other than entertainment

50% deductible 100% non-deductible

Networking meal with non-client with substantiation of business purpose other than entertainment

50% deductible 50% deductible

Networking meal with non-client with no substantiation of business purpose other than entertainment

50% deductible 100% non-deductible


Employee Recreation Examples

Type of M&EExpenditure

Old Law Deductibility New Law Deductibility

Holiday party 100% deductible if non-discriminatory; 50% non-deductible if discriminatory

100% deductible if non-discriminatory; non-deductible if discriminatory

Sports leagues (e.g. softball league)

100% deductible if non-discriminatory; 50% non-deductible if discriminatory


Food at/after sports league game 100% deductible if non-discriminatory; 50% non-deductible if discriminatory


Employee “morale” events 100% deductible if non-discriminatory; 50% non-deductible if discriminatory


Counseling/mentor meals 100% deductible if non-discriminatory; 50% non-deductible if discriminatory (discrimination determined at level of each meal)

100% deductible if non-discriminatory; non-deductible if discriminatory (may consider treating as de minimis meal to obtain 50% deduction – need to consider frequency)

Cake to celebrate birthdays/anniversaries

100% deductible if non-discriminatory; 50% non-deductible if discriminatory

100% deductible if non-discriminatory; non-deductible if discriminatory (may consider treating as de minimis meal to obtain 50% deduction – need to consider frequency)


This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

This presentation contains general information only and Deloitte is not, by means of this presentation, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This presentation is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this presentation.

About DeloitteDeloitte refers to Deloitte Tax LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/about to learn more about our legal structure. Certain services may not be available to attest clients under the rules and regulations of public accounting.

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