Calvetti Ferguson

New Tax Law Puts Businesses on a Diet

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Over the years, businesses have become accustomed to the benefits of deducting business-related meal and entertainment expenses. However, the Tax Cuts and Jobs Act of 2017 has changed the deductibility of certain meal and entertainment expenses.

Prior to 2018, a taxpayer could deduct 50 percent of business meals and entertainment and 100 percent of meals provided through an on-premise cafeteria or meals provided for the convenience of the employer. Under the new law, effective January 1, 2018, entertainment expenses are no longer deductible, but client business meals, meals provided through an on-premise cafeteria or meals provided for the convenience of the employer (such as meals provided to employees who need to be available throughout the mealtime) are subject to the 50 percent limitation. However, the 50 percent limitation is in place for a limited time only. For tax years beginning on, or after, January 1, 2026, these items will not be deductible at all.

No change was made to the rule allowing a 50 percent deduction for business meals and a 100 percent deduction for expenses incurred for recreational, social, or similar activities (including facilities, but not club dues) primarily for the benefit of employees (other than employees who are highly compensated employees). Thus, social events such as a company holiday party, a company picnic, or a company outing to a sporting event are still 100% deductible.

Businesses can maximize their tax deductions and save time on tax preparation by setting up separate general ledger accounts for business meals (50 percent deductible), entertainment (non-deductible), and recreational/social employee expenses (100 percent deductible). Because entertainment-related meals are now treated differently from client business meals, it may be necessary to establish new documentation procedures or information management systems in order to account for each separate category of meals. It will be extremely important for businesses to separately track and account for meals and entertainment so that these deductions are not inadvertently lost by lumping them with the non-deductible meal and entertainment costs.

Based on recent public comments from IRS officials, the following is an understanding of the deductibility allowance of business meals until additional guidance is available.

Event 2017 Expenses (Old Rules) 2018 Expenses (New Rules)
Office Holiday Party or Summer Picnic 100% deductible 100% deductible
Client Business Meals 50% deductible if taxpayer is present, and not lavish or extravagant 50% deductible if business is conducted, taxpayer is present, and not lavish or extravagant
Entertainment-related Meals 50% deductible No deduction (e.g., meals incurred when no business is conducted, potentially at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation and similar trips)
Transportation to/from Restaurant for Client Business Meal 100% deductible 100% deductible
Sporting Event Tickets 50% deductible for face value of ticket.

50% deductible for skybox expenses to the extent of non-luxury seat ticket face value in such box.

100% deductible for charitable sporting events.

Contributions for the right to purchase tickets to an educational institution’s athletic events 80% deductible.

50% for transportation to/from and parking at sporting events.

No deduction

No deduction

No deduction

No deduction

No deduction

Club Memberships No deduction for club dues; however, 50% deduction for expenses incurred at a club organized for business, pleasure, recreation, or other social purposes if related to an active trade or business No deduction
Meals Provided for the Convenience of Employer 100% deductible provided they are excludable from employee’s gross income as de minimis fringe benefits; otherwise 50% deductible 50% deductible
(nondeductible after 2025)
Meals Provided to Employees Occasionally and Overtime Employee Meals 100% deductible provided they are excludable from employees’ gross income as de minimis fringe benefits; otherwise 50% deductible 50% deductible
Water, Coffee, and Snacks at the Office 100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise 50% deductible 50% deductible
(nondeductible after 2025)
Meals in Office During Meetings of Employees, Stockholders, Agents, or Directors 50% deductible 50% deductible
Meals during Business Travel 50% deductible 50% deductible
Meals at a Seminar or Conference, or at a Business League Event 50% deductible 50% deductible
Meals included in Charitable Sports Package 100% deductible 50% deductible
Meals Included as Taxable Compensation to Employee or Independent Contractor 100% deductible 100% deductible
Meals Expenses Sold to a Client or Customer (or Reimbursed) 100% deductible 100% deductible
Food Offered to the Public for Free 100% deductible 100% deductible

Bottom line, the cost of doing business just went up and the deduction for entertainment has disappeared. Stay tuned as we see how the IRS will implement the new law. Of course, a slew of audits and court cases will follow that will give further guidance regarding the new provisions. It’s not over yet, it is in effect until 2025, then a future Congress will have to decide.

Will more questions arise? Yes. Will there be exceptions to the general rules? Absolutely. Will there be further developments? Of course. Contact your Calvetti Ferguson tax advisor to discuss your specific situation.

Sarita_Akin

Sarita Akin, Senior Manager

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