Ask The Expert: How is the business deduction for meals and entertainment changing?

With the new tax reform, how is the business deduction for meals and entertainment changing?

Answer: The new law provides for stricter limits on the deductibility of the meals and entertainment expenses that businesses incur after December 31st, 2017. Under the new law, entertainment expenses are fully non-deductible unless they fall under some specific exceptions. One of these exceptions is for expenses incurred by an employer for recreation/social/similar activities primarily for the benefit of the employees, other than the highly-compensated employees. Therefore, office holiday parties, summer work outings, and other similar events are still fully deductible. However, the expenses incurred for the entertainment of clients, for example amount spent on golf outings, baseball/basketball/football tickets, theatre shows are now fully non-deductible whereas they were 50% deductible under the old rules. Even qualified charitable events that were 100% deductible earlier are now fully non-deductible.

Business meals provided for the convenience of the employer are now only 50% deductible, whereas they were fully deductible earlier. Deductibility of business meals with clients and customers stays the same, which means that these items are still 50% deductible under the new law.

To sum it all up, expenses incurred on business meals are 50% deductible and expenses incurred on entertainment except for the benefit of employees are fully non-deductible under the new rules.

Businesses should keep the new rules in mind as they plan their 2018 meals and entertainment budget. To make things easier at tax time and maximize the tax deduction, businesses are advised to separate meals and entertainment activity into three different accounts – one for non-deductible entertainment, one for 50% deductible business meals and one for 100% deductible company-wide parties.

Swati Jain, CPA
Senior Accountant
Wegner CPAs

 

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