How 2017 Tax Law Changes May Affect Meals & Entertainment Expense Deductions

Much to the chagrin of business owners, the Tax Cuts and Jobs Act of 2017 eliminated the ability of businesses to deduct the cost of entertainment provided to clients; thankfully, the new law retains the ability to deduct meal expenses. ARGI CPAs and Advisors has prepared the following summary of these changes to assist you in planning for your business needs.

 

Client Entertainment Expenses No Longer Deductible

 

Gone are the days of taking clients out to a ballgame and writing off half the cost of the event as a business expense – as of January 1, 2018, these expenses can no longer be deducted.

 

Specifically, under the new law, no deduction is allowed for entertainment, amusement, or recreation, or a faculty used in connection with the above, even if such expenses are directly related to the active conduct of your trade or business.

 

So just about anything that has been tracked by accounting as a client entertainment expense cannot be written off on your 2018 tax return, or any future return until the deduction is reinstated.

 

However, as with anything, there are always exceptions to the rule. While expenses for entertaining a client cannot be deducted, the new law preserves the ability to deduct certain entertainment expenses for employees or internal business meetings. Entertainment expenses that can still be deducted (subject to the 50% limitation) are as follows:

 

  1. Expenses for goods, services, and facilities that are treated as compensation for the employee-recipient. This would include paying for an employee’s vacation as a reward for exceeding their sales goals.

 

  1. Entertainment expenses primarily incurred for the benefit of employees. The cost of your annual Christmas parties are still deductible!

 

  1. Entertainment expenses directly related to bona fide business meetings of employees, stockholders, or directors. For example, performances or décor purchased for an annual awards ceremony.

 

  1. Expenses for entertainment sold to customers. If your business is the sale of entertainment, you can, of course, still deduct those expenses.

 

Cost of Meals Still Deductible

 

Although you may not be able to write off the cost of box seats purchased to entertain clients, you can still write off half the cost of meals catered to the event.

 

Due to confusion surrounding the elimination of entertainment expenses and the retention of the meal deduction, the IRS issued guidelines on when an otherwise allowable business meal expense can be deducted. To take the deduction:

 

  1. The expense must be ordinary and necessary;

 

  1. The expense cannot be not lavish or extravagant under the circumstances;

 

  1. The taxpayer, or an employee of the taxpayer, must be present when the food or beverages are furnished;

 

  1. The food and beverages must be provided to a current or potential business customer, client, consultant, or similar business contact; and

 

  1. For food and beverages provided during or at an entertainment activity, they must be purchased separately from the entertainment, or the cost of the food and beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.

 

The new tax law also retains the ability of employers to deduct the cost of meals provided for employees on the business’ premises. However, this deduction will no longer be available starting in 2026.

 

What this Means for You

 

The elimination of entertainment expense deduction may impact how you manage your client relations. Since you can no longer write off half the cost of entertainment, taking your client to events will become more costly for your business. You may want to consider switching from hot dogs in the box seats to a multi-course dinner at a high-end restaurant.

 

If you do take clients to events, be sure any invoices clearly separate out the entertainment expenses from the meal expenses. And prior to year-end, make sure your accounting department has separated out the cost of entertainment provided to clients from the cost of meals provided to clients. You’ll want to be sure to keep an accurate account of those expenses, so your tax preparer will know what to deduct on your returns.

 

But of course, keep those Christmas parties going!

 

Sources: IRS Notice 2018-76; Code Sec. 274,as amended by the Tax Cuts and Jobs Act (P.L. 115-97).

 

The statements contained herein are not intended to constitute written tax advice within the meaning of IRS Circular 230 §10.37. These statements are solely intended to communicate general information for discussion purposes and should not be interpreted as written tax advice nor should they be relied on as such. If you would like to speak with someone in our office regarding the content in this article, please contact us at 502-753-0609 and we will be happy to assist you.

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