Deductibility of Entertainment Expenses Under Tax Reform
The new Tax Reform Act enacted under President Donald Trump makes significant changes to the rules and limitations to the deductibility of entertainment and meal expenses for businesses.
What is “Entertainment”?
In general, entertainment is defined as “any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity.” Intentionally broad, this definition allowed for numerous exceptions to the general rule, making certain meals and entertainment expenses 100 percent deductible.
While the deduction for meals and entertainment was previously one of the most broadly applicable avenues for businesses to claim significant tax savings, under the Act, entertainment expenses incurred or paid after December 31, 2017 are non-deductible unless they fall under specific exceptions in Code Section 274(e).
One of these such exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.” Under the Act, then, entertainment events like office holiday parties are still deductible. However, whereas prior to the Act expenses for client entertainment were 50 percent deductible (with tickets to qualified charity events being completely tax deductible), under the new Act, no deduction is provided for entertainment expenses.
In addition, business meals provided for the convenience of the employer, which were previously fully deductible, are now only 50 percent deductible. Unless further action is taken by Congress, these meals will become nondeductible after 2025.
Plan for 2018 Now
As such, businesses should take care to keep these new rules in mind as they plan and budget for meal and entertainment expenses in the coming years. Some changes to existing systems and processes should be made to accommodate these changes in deductions, and companies should review the tax treatment of their meal and entertainment deductions to identify which expenses may still be 100 percent deductible.
Some expenses that remain fully deductible include
- expenses treated as employee compensation
- reimbursed expenses
- expenses for recreational, social, or similar activities primarily for the benefit of employees
- expenses for goods, services, and facilities made available by the taxpayer to the general public
- expenses for goods or services which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration
- expenses includable in income of persons who are not employees.
Get Expert Advice
As you prepare your 2017 business income tax returns, consider the ways in which the new meal and entertainment deductions may impact your bottom line in the 2018 tax year and adjust accordingly. If you have any questions about how the new Act may impact your business, please contact the tax experts at Sousa and Weber, LLP. Truly understanding how these affect your business now may save you time, aggravation and capital in years to come.