Author: Jonathan Hitter
The Tax Cuts and Jobs Act (TCJA) offers many taxpayers a break through corporate and individual tax rate reductions. However, the new legislation comes with a few thorns. One of the biggest surprises to business owners is the elimination of the entertainment deduction. For over 30 years, deals have been made over meals, in front of baseball games, or between the 5th and 15th hole on the golf course, and this cost of winning business was eligible for a tax write-off. Not anymore.
Here is a look at the changes:
Then: 100% deduction of “de minimis fringe benefits” such as meals provided to employees for overtime
Now: 50% deduction of “de minimis fringe benefits”*
Then: 100% deduction of the cost of providing meals to employees, including facility costs at a qualifying employer-operated eating facility.
Now: 50% deduction of the cost of providing meals to employees, including facility costs at a qualifying employer-operated eating facility until 2025, at which point deductions will be disallowed.
Then: 50-100% deduction of the cost of meals furnished to an employee for the convenience of the employer (i.e. Company lunch meeting)
Now: 50% deduction of the cost of meals furnished to an employee for the convenience of the employer, until 2025, at which point deductions will be disallowed.
Then: 50% deduction of business-related entertainment expenses such as tickets to sporting events, theater tickets et al.
Now: 50% of food and beverage expenses only incurred at entertainment events* + 0% deduction of business-related entertainment expenses such as tickets to sporting events, theater tickets, et al.
*awaiting IRS guidance on the law
What hasn’t changed:
- Meal and entertainment expenses reported as taxable compensation to employees (100% deductible).
- Food, beverage, and entertainment expenses incurred for recreational, social, or similar activities provided primarily for the benefit of employees (e.g. Holiday party) (100% deductible).
- Food, beverages, and entertainment that were made available to the public (100% deductible).
- Food, beverages, and entertainment sold to customers for full value, including the cost of related facilities (100% deductible).
- Meals and entertainment that were reported as taxable income to a non-employee recipient on a Form 1099, Miscellaneous Income (100% deductible).
- The cost of meals for you or an employee while away from home on business-related travel (50% deductible).
- The cost of business-related meals with business associates (50% deductible). Before the TCJA took effect, a 50% deduction was allowed for client business meals that met certain requirements. The 50% deduction is still allowed, however, there is some uncertainty about food and beverage expenditures incurred at entertainment venues (sporting events, theaters, etc.)
Tax practitioners have called on the IRS for further guidance but are still awaiting their response.
It is imperative that business owners take note of the above changes and correct their books as soon as possible, separating meals from entertainment expenses and ensuring that the costs of closing business are not included with their marketing line items. As always, keeping thorough records and documentation will be critical to safeguarding deductions. There is no such thing as too much information – be sure to note the who, what, where, when, why and how of all business-related client meals and expenditures. It may be prudent to talk to your tax advisor about the best strategy for obtaining the largest business and entertainment tax deduction. If you have any questions about how the TCJA will affect your business, please contact one of our tax professionals today.