Tax Cuts and Jobs Act: Meals and Entertainment
May 14, 2019
Business owners understand the value of developing relationships, whether it is with a potential client or fellow business partner. Deepening your existing relationships and building new ones through activities such as a meal or an entertainment event can be key to growth in your business. Even though these expenses are ordinary and necessary to operate your business, the IRS is enforcing limitations on the related tax benefit of these expenses per the enactment of the Tax Cuts and Jobs Act (TCJA).
Prior to this tax reform, food/beverage and entertainment expenses associated with operating your trade or business were 50% deductible. As of January 1, 2018, the TCJA has completely eliminated entertainment expenses and further restricted allowable out-of-office and in office business meal expense deductions. Here are the significant changes pertaining to meals and entertainment that you need to be aware of:
The TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. In essence, entertainment expenses are no longer deductible.
Let’s first get down to the basics. The IRS defines entertainment as any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertainment at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, hunting, fishing, vacations, and similar trips. So any tickets you purchase to sporting events, concerts, or charitable events for your clients are no longer deductible.
The holidays are said to be the most wonderful time of the year and indeed it is a time everyone gets together. I know what you’re thinking, “Are our office holiday party expenses eliminated as well?” The answer is NO! Good news – you can still deduct 100% of the costs associated with your company-wide social or recreational events, such as a holiday party or a summer office picnic. These expenses for recreational, social or similar activities MUST BE provided primarily for the benefit of employees, other than highly compensated employees. These expenses are 100% deductible. IMPORTANT! Keep in mind that for record keeping purposes, these expenses are not considered entertainment, rather they are reclassed as an office expense.
In general, taxpayers can continue to deduct 50% of the cost of business meals. There are several circumstances when a business meal occurs and the deductibility of the expense may be unclear, hence the IRS Notice 2018-76. This has created guidelines to identify when business meals are considered nondeductible entertainment and when they are considered 50% deductible. When in doubt, refer to this:
- The expense is an ordinary and necessary expense under code section 162(a) paid or incurred during the taxable year in carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer is present at the furnishing of the food or beverages;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Below is a table that summarizes the deductibility of meal and entertainment events, per TCJA. Please note that some of these deductions will go away after December of 2025, so you may want to consider additional planning.
** if the meal cost is included in an entertainment event package cost, the meal cost is not deductible.
In sum, entertainment expenses are no longer deductible and meals are generally 50% deductible beginning 2018 and beyond. With that said, it is critical to account for transactions and categorize each properly. Also, make sure you are not cheating yourself from a potential tax benefit, and consider whether transactions are more property classified to advertising (for example) versus nondeductible entertainment. A best practice for business meal expenses is to keep the receipt, and document on the receipt who you had the business meeting with, and what was discussed. For further guidance feel free to call us at 713-590-3000 and we will be happy to help you.
About the Author
Megan Johnson joined Reimer, McGuinness & Associates in 2013. As a senior staff accountant, Megan serves clients in a variety of ways, including tax compliance and tax planning. Her primary responsibilities include preparation of complex tax returns for individuals, corporations, partnerships and non-profit organizations. Megan earned her Bachelor’s degree in Finance from the University of Houston and is currently working towards earning her CPA license. When she is out of the office, she enjoys being outdoors and spending time with her family.