Alert: Significant Changes Coming for Meal and Entertainment Expenses
With every passing day, more is being revealed about the implications of the Tax Cuts and Jobs Act of 2017 (“the Act”). One area that increasingly coming into focus is the significant overhaul of the treatment of business and entertainment expenses. Beginning with tax year 2018, the Act reduces or eliminates the deductibility of expenses under these categories. Here is a high level overview.
Entertainment: ELIMINATED
- Old rule: 50% deductible to face value of item
- New rule: Not deductible
- What’s affected:
- Theater and event tickets
- Golf outings
- Club memberships
- Exceptions:
- Tickets to charitable events remain 100% deductible
- Expenses related to social/recreational activities for employees (e.g. the holiday party, company picnic or other company-wide event) remain 100% deductible
- Unclear: Client meals that take place on the same date as an “entertainment” outing or purchased at an entertainment venue
Meals/Food: CHANGES IN SEVERAL CATEGORIES
Meals will now be treated differently depending on specific circumstances.
Business Meals During Travel – NO CHANGE
- Old rule: 50% deductible
- New rule: 50% deductible
- What’s affected:
- Employee meals while on business travel
Client Meals – NO CHANGE
- Old rule: 50% deductible
- New rule: 50% deductible
- What’s affected:
- Meals with clients
- Unclear: Client meals that take place on the same date as an “entertainment” outing or purchased at an entertainment venue
Employee Meals
This is one of the most complex areas of the new law.
Meals Provided for Employer Convenience – GRADUAL PHASE OUT
- Old rule: 100% deductible
- New rule: 50% deductible from tax year 2018; not deductible after 2025
- What’s affected:
- Meals provided for the convenience of the employer (such as for employees working overtime)
Meals Provided During Meetings – NO CHANGE
- Old rule: 50% deductible
- New rule: 50% deductible
- What’s affected:
- Meals provided during meetings
Meals Counted as Compensation – NO CHANGE
- Old rule: 50% deductible
- New rule: 50% deductible
- What’s affected:
- Meals provided for employees reported on Form W-2
- Meals provided for non-employees reported on Form 1099
Meals/Food for General Public – NO CHANGE
- Old rule: 100% deductible
- New rule: 100% deductible
- What’s affected:
- Food made available to the general public as part of a promotion, etc.
The Bottom Line
These new rules make it more important than ever that businesses keep detailed records including names and dates associated with claimed expenses. Businesses should also resist the temptation to bury meal and entertainment expenses in their marketing/promotional deductions. Both the law and the IRS have made it very clear that this is not allowable.
Contact your AKM CPA today to do some advance planning so you can avoid unpleasant tax surprises when you file next year’s tax returns.