With the new tax reform enacted for 2018, we get a lot of questions from clients asking how the changes to the meals and entertainment expense deduction might affect them.
Here is a brief overview that hopefully helps you understand the implications and how you can carefully track these costs.
Entertainment expense
Before the Tax Cuts and Jobs Act, the deduction was limited to 50 percent of the amount otherwise deductible. Under the TCJA, the deduction for entertainment has been completely repealed. Taxpayers are no longer able to write-off entertainment expenses used for outside of internal purposes.
Business meals
The business meal expense deduction has not changed under the TCJA. A 50 percent deduction is still allowed for expenses related to business meals that are not lavish or extravagant.
*The consensus is that business meals are not caught under the entertainment umbrella and remain 50 percent deductible, which is what the committee report indicated, but it’s not the law,”. “Nothing in the code says that meals are only entertainment and can be nothing else. The 50 percent deduction for business meals will likely remain, but we just don’t know for sure.” The IRS will provide more clear guidance in the coming months. What it will come down to is whether there is a business purpose, and what the business purpose is.
Documentation. Keeping written records of these business meals will be increasingly important this year, as it will provide more opportunity to deduct items now considered ‘gray area’ due to the vague rules.
What does this mean?
Therefore, all forms of business entertainment, including golf outings, fishing, sailing, sporting events, hunting, theater tickets, license fees paid to sporting arenas, golf club dues, etc. are entirely nondeductible, even if a substantial and bona fide business discussion is associated with the activity.
On the other hand, taxpayers may still deduct 50% of food or beverages incurred at such events, but only if they can prove that business was conducted
Example. If you take a prospective client to a game, the tickets for that event would not be deductible, however if you go to dinner beforehand and talk about business, that’s trickier. Arguably the meal itself would be 50 percent deductible, but depending on what was discussed.
What about employee entertainment or team building events?
Contrary to misconception, internal expenses such as holiday parties, team building outings that boost employee morale are still fully deductible. . The only recreation expenses that might still be 100% deductible are expenses for recreational social, or similar activities (including facilities) primarily for the benefit of employees
What is the purpose of eliminating the entertainment expense deduction?
The idea is to cut back on entertainment side, but to allow for the business meal to take place,” said Roger Harris, president of Padgett Business Services. “Make sure that while you’re eating you’re discussing business matters. If the conversation is boring and you feel like falling asleep, it’s probably deductible.”
In many cases, taxpayers do not separately track food/beverage expenses and entertainment expenses. In addition, substantiation for such expenses does not always separately state how much of an expense relates to food/beverages and how much relates to entertainment.
What taxpayers should do.
Now that entertainment is nondeductible, taxpayers should assess their current inventory of licensing agreements with entertainment venues, social clubs and other entertainment/recreation facilities.
Also, remembering to note the importance of documenting business meals that you want to be able to write-off.
If you have further questions or would like to talk to us about other tax planning tips for 2018, please contact us: info@capatacpa.com.
