With its effect being immediate and unanswered questions lingering, the Tax Cuts and Jobs Act largely eliminates the deduction for entertainment expenses, and businesses should incorporate this change without delay.
Under the prior law, taxpayers were able to deduct 50% of expenses incurred for entertainment, amusement, or recreation directly related to the active conduct of a taxpayer’s business or trade. The new law, however, generally eliminates the deduction for expenses paid or incurred after December 31, 2017. Although there are a few exceptions, entertainment expenses are non-deductible as of January 1, 2018. It has been made clear that a deduction is not permitted for a client entertaining at sporting events, on the golf course, or any similar entertainment expense. What is less clear, though, is how food and beverage expenses or meals are affected. The Joint Committee on Taxation (JCT) stated “taxpayers may still generally deduct 50% of food and beverage expenses associated with operating a trade or business;” however, the JCT did not define what expenses are associated with “operating a trade or business” other than it would include meals provided to employees traveling for work. It is still unclear whether food and beverage expenses incurred in connection with an entertainment event will remain 50% deductible.
Although many entertainment expense deductions are no longer allowed, there are some that remain the same. Some common exceptions, for which costs are likely deductible, are those for recreational and social events incurred for the benefit of employees (think use of tickets by employees made available by the employer), as well as recreational and social events such as holiday parties, annual picnics, or summer outings.
Additional exceptions not affected by the new law:
- Food and beverage provided on the business property of the taxpayer for employees.
- With some exceptions, meals and entertainment treated as compensation to an employee.*
- Employees and independent contractors are entitled to a full deduction for meals and entertainment expenses for which they are reimbursed by another person, whether, or not, the other person is the employer.*
- Expenses incurred for recreational, social, or like activities primarily for the benefit of employees; however, this does not include expenses incurred for the benefit of highly compensated employees.*
- Expenses incurred by a taxpayer which are directly related to business meetings of employees, stockholders, agents, or directors.
- Expenses which are directly related to attendance at a business meeting or convention of a tax-exempt business league or other organization described in IRC section 501(b)(6).
- Expenses for goods, services, and facilities which the taxpayer makes available to the general public.*
- Expenses for goods and services which are sold by the taxpayer. An example is the cost of operating a cruise ship, which will be deductible because the cruise ship’s entertainment is being sold to customers.*
- Expenses included in the gross income of a recipient, who is not an employee of the taxpayer, as compensation for services rendered or as a prize or award.*
*Expenses falling within the exceptions described above will not be subject to the 50% limit, meaning they are fully deductible.
With these changes being immediate, the Lawhorn CPA Group team recommends separate general ledger accounts for entertainment and food and beverage expenses. This way, to the extent a 50% deduction is permitted for food and beverage expense, it will be clearly separated from the non-deductible entertainment expense.
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