The tax reform legislation that Congress signed into law on December 22, 2017, was the most significant change to the tax system in over three decades. The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. One of those changes, the elimination of a business-related deduction used for entertainment, amusement or recreation expenses, will make it costlier for business owners to entertain clients.
Previously, if an entertainment or meal expense was related to or associated with the active conduct of a trade or business, it was deductible up to 50 percent. Under the new tax code, these expenses are now considered the cost of doing business. In the chart below, we have highlighted the major changes.
| Activity | 2017 Old Rules | 2018 New Rules |
|---|---|---|
| Qualified client meal expenses | 50% deductible | 50% deductible |
| Qualified employee meal expenses | 50% deductible | 50% deductible |
| Meals provided for employer convenience | 100% deductible | 50% deductible |
| Client entertainment expenses | 50% deductible | No deduction for entertainment expenses |
| Event tickets | 50% deductible at face value of ticket | No deduction for entertainment expenses |
| Qualified charitable events | 100% deductible | No deduction for entertainment expenses |
| Office holiday parties | 100% deductible | 100% deductible |
The elimination of this deduction will impact business owners who are accustomed to treating clients to golf outings or providing clients with tickets to sporting events or concerts. Businesses will have to re-evaluate their entertainment expenses related to their trade or business, as these items are no longer 50 percent deductible.
In consideration of the elimination of this deduction, we recommend creating separate accounts for meals and entertainment expenses. Educating employees to separate their expenses will be vital as business meals will remain 50 percent deductible until 2025.
The IRS recently issued guidance regarding the business expense deduction for meals and entertainment expenses:
Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
Furthermore, food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.
The Department of the Treasury and the IRS expect to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment. Until the proposed regulations come into effect, taxpayers can rely on the guidance in Notice 2018-76.
Auditors notoriously target entertainment expenses. Considering the law change, we anticipate these expenses to be a heightened area of concern during an audit. The professionals in our office can help ensure you are in compliance; call us today.