The sweeping changes made to the US Tax Code for 2018 have a major impact on some of the food and entertainment expenses that businesses have been deducting for years. Under the tax reform legislation passed in late 2017, some of those deductions are reduced, and others have disappeared altogether. Yet, there are still some specific circumstances where the full 100% deduction still applies.
Sound confusing? Don’t worry. Here’s a brief primer on how the new tax laws impact meals and entertainment expense deductions for 2018.
Changes to the Tax Law
It used to be that, in general, businesses could deduct 50% of entertainment expenses, and meals were deductible up to 100%.
Now, under the Tax Cuts and Jobs Act of 2017, entertainment expenses are nondeductible, and meals can be deducted up to 50%. These changes affect any expenses that occurred on or after January 1, 2018.
Here are some specifics from the new changes:
- Meals: Meals are now 50% deductible, and can be deducted at that rate if business was discussed (whether it’s an internal meeting or client-based meeting) or if it was a business trip-related meal. For instance, the following situations qualify as a meal and are thus 50% deductible:
- A meal with a client to discuss business
- A meal with coworkers to discuss business
- A meal eaten by an employee while on a business trip
- Entertainment: Entertainment is no longer deductible. Things that count as entertainment are any activities that could be categorized as amusement or recreation. For instance, here’s a small list of some items that count as entertainment:
- Professional, college, or high school sporting event tickets/box seats
- Meals shared with clients or employees that don’t discuss business
- Membership dues to entertainment-focused clubs (ie- golf club membership, hotel clubs, airline clubs, country clubs, etc.). NOTE: Business-related clubs with membership dues don’t qualify as entertainment and therefore are still deductible.
- Transportation to/from entertainment events
Of course, as with any tax-related change, there are exceptions to every rule and this is not an exhaustive list. We recommend that you to check with a tax expert on what applies to your business.
Finding Tax Deduction Opportunities
While the new tax laws put more restrictions on what can be deducted, there are still a number of exceptions which will be phased out in the future. The following are all types of meal and entertainment (M&E) expenses that may still qualify for a 100% deduction for the time being:
- M&E expenses treated as compensation – expenses must be included as wages for income tax withholding purposes.
- Reimbursed expenses – expenses paid for by other businesses under a reimbursement arrangement, so long as the taxpayer provides a breakdown of those expenses.
- Expenses primarily for the benefit of employees – includes facilities, recreational or social activities for non-highly compensated employees.
- Expenses for items available to the public – includes goods, services, or facilities made available by the taxpayer for the general public.
- Expenses included as income for non-employees – expenses included in the gross income of non-employees as compensation for services rendered or as prizes.
Again, some of these stipulations will also change over time. For example, meals offered as a convenience to the employer are currently 50% deductible but will become 0% deductible in 2025. So, it will be important to continually monitor changes in the law as they pertain to meal and entertainment expenses.
Documentation is Key
Experts believe these areas will be among those most closely scrutinized by the IRS, so it will be vital that you have the proper documentation methods in place to track these events. Still, a tax professional should be able to guide you in establishing the proper accounting methodology.
While the new tax law is more restrictive, with a solid system for documenting these activities and a comprehensive understanding of the deduction requirements, you can continue to realize tax benefits from meals and entertainment expenses.