Business meals + entertainment expenses

What exactly are the rules?

Kelly P. Lynch, CPA

Remember when you could take clients, prospects and other business associates out to dinner or special events and write the expense off as business development? Not anymore. The Tax Cuts and Jobs Act of 2017 (TCJA) changed the rules on deductibility. Since the act was passed there has been a lot of confusion on what exactly is deductible. In October 2018, Notice 2018-76 was issued to answer those questions. Here’s an overview of the new rules that impact you.

Old deduction rules

Ordinary and necessary expenses for activities generally considered to be entertainment, amusement or recreation were not deductible unless you could prove the expense was:

  1. Directly related to or
  2. A genuine business discussion regarding your trade, business or income-producing activity that took place before or after the activity/meal

For example, you take a client out for a round of golf and plan to discuss updates to your new line and how your client will benefit from new equipment. You briefly touch on it but then the game gets intense and before you know it you’re throwing back martinis at the clubhouse. Because you briefly talked business you could claim the day was for business purposes and deduct 50% of the bill as an entertainment expense.

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New tax law

The new tax law got rid of deductions for entertainment expenses. Here are a few examples of the types of expenses that are no longer deductible:

  • Tickets to sporting events
  • Stadium license fees
  • Private boxes at sporting events
  • Theater tickets
  • Golf club dues

The law does allow food and beverages purchased or consumed during entertainment events as a 50% expense but it must be purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of entertainment on one or more bills, invoices or receipts.

Business meals

Under the old law, business meal expenses were deductible at 50%. Notice 2018-76 provides clarification under the new tax law. To qualify as 50% deductible the expense must be:

  1. Ordinary and necessary in carrying on a trade or business
  2. Not lavish or extravagant
  3. The taxpayer or employee of the taxpayer is present in the furnishing of food and beverages
  4. The food and beverages are provided to a current client, prospect or a referral source

Employee expenses reimbursed by the employer are treated as made under an accountable plan only if the expense meets a business connection requirement. Amounts reimbursed under an accountable plan are tax-free to the employee. The employer deducts the reimbursement subject to the 50% limitation. An accountable plan is one where the employee submits a receipt and documents the time, place, amount and business purpose.

Heads up. Under the new law, meals provided by an employer for the employees are now 50% deductible, not fully deductible as was previously allowed. So when you bring in lunches for your employees, you can only deduct 50%.

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Exempt expenses

Some exempted expenses under the old law are still exempt. Employer expenses for a recreational, social or similar activity primarily for the benefit of his or her employees (holiday party, annual picnic or summer outing) are still exempt. This rule also applies to an expense for the use of a facility (such as a swimming pool, baseball diamond, bowling alley or golf course) in connection with recreational, social or similar activities.

Stay informed

Treasury announced that regulations are forthcoming and for now taxpayers can rely on Notice 2018-76 for interim guidance. If you have questions, be sure to contact your Henry+Horne tax adviser. You can also get the latest tax news by subscribing to our Tax Insights blog.

Kelly P. Lynch, CPA, Manager, specializes in tax and consulting services, state and local tax and research and development tax credits for closely held businesses and their owners. You can reach him at (480) 839-4900 or KellyL@hhcpa.com.