Accounting On Us
Business meals + entertainment expenses
Still deductible under tax reform?
Kelly P. Lynch, CPA
As a professional, you’re probably used to taking clients, prospects and other associates out to dinner or special events in the name of growing your business and relationships – and later deducting those expenses. Enter the Tax Cuts and Jobs Act of 2017 (TCJA). Effective December 31, 2017, certain business meals and entertainment expenses are no longer deductible. Here’s an overview of the new rules that impact you.
Old deduction rules
Under the old tax law, you could not deduct ordinary and necessary expenses for activities generally considered to be entertainment, amusement or recreation, unless you established that the expense was:
- Directly related to, or
- Included a bona fide business discussion associated with your trade, business or income-producing activity that took place before or after the activity/meal.
For example, you’re an attorney taking your new client to an Arizona Cardinals game. Your goal is to discuss your client’s plans to restructure operations. So, you talk a little business, but obviously the game lasts three to four hours and the majority of the time with your client is spent watching the game. However, because you talked about your client’s plans and how your business can help, even though this was entertainment, it’s tied into business purposes and, therefore, you could deduct 50% of your cost of entertainment.
New tax law
The new tax law did away with the deduction for entertainment expenses. Here 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
- Theatre tickets
- Golf club dues
So, now if you take a major client to a nightclub or sporting event, there’s no more writing off part of those expenses.
Under the old law, business meal expenses were deductible at 50%. However, the new tax law does not explain the tax treatment for business meals. The TCJA keeps intact “business meals”—which carries additional requirements that apply to meals only, including the unique requirement that the taxpayer (or his agent) be present at the meal. This implies that a “business meal,” such as the ones we’ve described above, might continue to be 50% deductible.
Under the tax regulations, an employee expense that is reimbursed by the employer is treated as made under an accountable plan only if it 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.
One other point to keep in mind under the new tax law is that meals provided by an employer for the employees are now 50% deductible where they were previously fully deductible. An example of this would be an employer catering in food for lunch while the employees were working on a project that had a tight deadline. The lunch is provided for the convenience of the employer.
Finally, some exempted expenses under the old law are still exempt. This covers expenses by an employer for a recreational, social or similar activity primarily for the benefit of his or her employees (such as a Christmas party, annual picnic or summer outing). 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.
We are expecting more clarification on these rules, particularly the deductibility of business meal expenses, so we’ll keep you updated. If you have questions, be sure to contact your Henry+Horne tax advisor. You can also get the latest tax news by subscribing to our Tax Insights blog.