Business Entertainment and Meals Deductions After Tax Reform

Business Entertainment and Meals Deductions After Tax Reform – What You Need To Know Now

The Tax Cuts and Jobs Act (TCJA or the Act) includes major changes to the deductions for business Groebel.jpgmeals and entertainment expenses. The deduction for business-related entertainment expenses is eliminated for amounts incurred after December 31, 2017. In addition there are substantial changes to the rules for deducting meals.

Elimination of Entertainment Expenses After December 31, 2017
The new law disallows most entertainment expenses incurred after December 31, 2017 including the following:

  • Sporting event tickets
  • License fees for stadium seating rights
  • Private boxes
  • Theatre tickets
  • Golf club outings
  • Hunting, fishing and selling outings
  • Entertainment related meals when no business in conducted

Note that 50% of the cost of food & beverages incurred at entertainment events is still deductible as long as business was conducted at the event.

These new rules are effective for amounts paid or incurred after December 31, 2017, regardless of the tax year end of the business. Therefore, fiscal year end entities will need to carefully track applicable expenses before and after December 31, 2017.

Suggested considerations

  • Assess current business expense policies and record keeping systems
    • Modify bookkeeping and accounting to segregate non-deductible entertainment expenses from partial deductible meals and wholly deductible employee recreation/social expenses in order to maximize deductions and save tax preparation time
      • Clarify business expense substantiation rules to differentiate expenses that relate to food/beverages and expenses for entertainment
    • Assess after tax economics of current licensing agreements with entertainment venues, social clubs and other entertainment/recreation facilities
  • For some pass through entities, such as professional service entities, possibly consider conversion to a C corporation thus losing the entertainment deduction at a 21% corporate rate rather than at a 37% top individual rate. However, there are many tax issues to consider making this conversion.

Business Meal Expense Changes
The Act retains the 50 percent deduction for most food and beverage expenses incurred in a trade or business. However, effective for amounts paid or incurred after December 31, 2017, new limitations will be imposed on meals expenses that were previously fully deductible.

Beginning on January 1, 2018, the cost of meals provided for the convenience of the employer are only 50 percent deductible. Previously, these meals were 100 percent deductible. Examples of meals expenses now subject to the 50% limitation include:

  • Client business meals if business is conducted and the taxpayer is present and the meal is not lavish or extravagant
  • Meals during business travel
  • Meals at a seminar or conference
  • In office meals during meetings of employees, stockholders or directors
  • Meals provided for the convenience of the employer – new
  • Meals provided to employees occasionally and overtime employee meals – new
  • Water, coffee and snacks in the office – new

The expenses for these last three new items are scheduled to become totally non-deductible after December 31, 2025.

The following are notable exceptions to the 50 percent limitation and are currently fully deductible:

  • Office holidays and picnics
  • Recreation, social activities for the benefit of employees, other than highly compensated employees
  • Entertainment included in compensation to employees

Note that the new limitations on meals are also effective for amounts incurred or paid after December 31, 2017. Therefore, the rules apply now without regard to the tax year end of the business and fiscal year end businesses will need to track the nature of affected meal expenses before and after December 31, 2017.

Suggested considerations

  • As indicated above, may need to modify bookkeeping and accounting to include newly 50 percent deductible meals in that category of existing meals expenses.
  • Assess policies for employee meal expenses and de minimis meal fringe benefits to determine if the changes under the Act warrant a policy change.

These new entertainment and meals expense deduction changes could be significant and they are effective right now. Businesses need to understand these changes and may need to make necessary changes to properly comply and to preserve allowable deductions. 

Please contact Barry D. Groebel if you have questions.