Entertaining or dining with clients, vendors and potential employees is a strong strategy for business owners looking to build lasting relationships. While these expenses are necessary for a successful business, the related tax benefits may be gone due to tax reform. The Tax Cuts and Jobs Act (TCJA) changed the business expense deduction for entertainment and changed the meals deduction for company activities. With all the changes that TCJA brought, business owners might not be aware of these changes and how they apply to their meals and entertainment expenses.
Prior to 2018, a business could deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a business discussion, associated with the active conduct of a trade or business. TCJA eliminated the deduction for any expenses related to activities generally considered entertainment or amusement.
Taxpayers can still deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. However, the TCJA reduced the deduction for food and beverage provided to employees in the office and for company business meetings. While a company used to be able to get a 100 percent deduction benefit, they now will only get a 50 percent benefit. Recreation or social meals for employees stay at 100% deductibility, examples include a company picnic or company Christmas party.
Here is a chart of some of the changes.
|Expense Type||Pre-Tax Reform Deductibility||Post-Tax Reform Deductibility|
|Food and beverage for employees||100%||50%|
|Employee, stockholder, business meetings||100%||50%|
|Recreation and social meals for employees||100%||100%|
|Entertainment or amusement||50%||0%|
Now more than ever, businesses need to understand their meals and entertainment expenses and ensure they are properly categorized and deducted to maximize tax benefits.
To properly accomplish integrating tax reform changes, businesses will need to make changes to their accounting and expense reporting systems. The KTLLP Tax Team is here to help, don’t hesitate to contact us with any meal and entertainment questions or best practices for tracking and reporting expenses.