Tax Changes: Meals & Entertainment
If you’re anything like the majority of Americans, you’ve heard mumbles of tax reform that was pushed through Congress at the tail end of 2017. Now that 2018 is halfway gone, those mumbles will steadily increase in volume until they grow to be raucous roars, signaling the dreaded arrival of tax season 2019. We get it. Tax law is no one’s idea of recreational reading. Even if you bravely attempt to wade into the ocean of information that is available online, neutral sources are hard to find, and easy to understand explanations are even tougher to come by. That’s where we come in.
Our goal is not only to prepare you for the impending tax season, (Yes, we know it’s July but trust us, a little planning now will go a long way come April 15th.) but also to inform you regarding how the Tax Cuts and Jobs Act affects you, the taxpayer. We will roll out bite-sized articles concerning relevant changes that resulted from the TCJA and explain how these changes could potentially affect your overall tax situation. So, sit back and yes, relax because amidst the sea of mumbles comes some much needed clarity.
Listen up business owners, because our first topic is for you. We are dissecting the new meals and entertainment deduction and how they should be accounted for beginning in 2018. Let’s go ahead and get the painful part out of the way, akin to ripping off a band aid… Anything deemed to be entertainment whether it be treating a prospective client to a round of golf, an evening at the theater, or tickets to the ballpark is no longer deductible as a business expense. Under the old law, these events have historically been deductible up to 50%. Due to some murky language used within the act itself, it remains unclear whether meals associated with such outings are deductible. We are advising our clients to err on the side of caution and consider them non-deductible unless Congress comes forward with further clarification. We’re crossing our giant foam fingers on that one.
Still with me? Breathe deep and let’s press forward. Employer-provided meals are now only partially deductible under the new tax law and there are some pretty rigid rules attached in order to claim such deduction. Fortunately, there are a few elements of the meals and entertainment category that remain unchanged by the TCJA such as travel meals being 50% deductible and meals provided to the general public (i.e. coffee and snacks provided in waiting areas) being fully deductible. [Refer to the table below for a comprehensive breakdown of meals and entertainment deductions and how they compare to previous years.]
|Expenses||Old Rules||New TCJA Rules||Reference|
|Entertainment (this includes current clients and prospects)||Meals: 50% deductible||Meals: Nondeductible as currently drafted in the code without additional guidance from Congress or Treasury.
No deduction for entertainment expenses.
|Sporting, concert, or other events: 50% deductible at face value on non-luxury ticket|
|Tickets to qualified charitable events: 100% deductible|
|Other entertainment: 50% deductible|
|Employee travel meals||50% deductible||50% deductible||IRC 274(n)(1)|
|Meals provided for the convenience of the employer||100% deductible provided the meals are excluded from the employee’s gross income as de minimis fringe benefits. Otherwise, 50% deductible.||50% deductible until 2025.
After 2025, nondeductible.
|Employee meals qualifying as de minimis fringe benefit (i.e. coffee, breakroom essentials, in-office birthday celebrations)||100% deductible||Potentially only 50% deductible; however, appears not to be what Congress intended. Technical corrections may provide for 100% deductibility.||IRC274(0)
|Meals and entertainment expenses treated as compensation||100% deductible||100% deductible||IRC274(e)(2)|
|Office holiday parties, picnics, summer outings||100% deductible||100% deductible||IRC274(e)(4)|
|Business meetings of employees, stockholders, agents, or directors||50% deductible||50% deductible||IRC274(n)(1)|
|Expenses for attendance at a business meeting or convention of a Section 501(c)(6) business league, chamber of commerce, real estate boards, and boards of trade||50% deductible||50% deductible||IRC274(e)(6)|
|Items available to the general public as a means of advertising or promoting goodwill in the community||100% deductible||100% deductible||IRC274(e)(7)|
You see, it isn’t all gloom and doom for our beloved business owners. Check back for our next article as we will discuss new corporate tax rates and how they could equate to impressive tax savings.