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Tax Reform - The Lowdown on Meal and Entertainment Deductions

The recently enacted Tax Cut & Jobs Bill eliminated the 50% deduction for most meal and entertainment costs starting in 2018. Of all the tax reform changes, this one is generating the most angst and questions among our clients who are business owners. Here's our take.

Meal and Entertainment Expenses - The Leftovers

Certain entertainment costs were always nondeductible, such as country club dues, boat purchases and hunting lodges. Prior to Tax Reform, however, out-of-pocket costs related to these facilities, such as greens fees, fuel, food and catering were 50% deductible.

Starting in 2018, all of the costs for activities considered to be entertainment, amusement or recreation are totally nondeductible. This now includes meals with customers, prospects and referral sources as well as tickets for sporting and theater events. It also includes membership dues for any club organized for business, pleasure, recreation and other social purposes. 

While we await further guidance from IRS, we are aware of several loopholes to the complete disallowance of meal and entertainment costs:
  1. The ancillary meal and entertainment costs of attending business meetings or conventions of certain nonprofit groups remain 100% deductible. These groups include chambers of commerce, real estate boards and trade or professional organizations.
  2. Meals and beverages consumed by employees while out of town on travel related to their business continue to be 50% deductible, unless the meal includes a customer, prospect or referral source, which then becomes totally nondeductible.
  3. Food and beverages furnished in a break room continue to be 100% deductible.
  4. Expenses for recreational and social activities for employees, such as a company picnic or holiday party, remain fully deductible.
  5. Expenses directly related to business meetings of employees, owners and directors, such as a business retreat or annual meeting remain fully deductible.
  6. The cost of providing meals and entertainment to the general public as a means of advertising or promoting goodwill will continue to be fully deductible. For example, an Open House for your business, or sponsoring a July 4th community picnic.

Where Do We Go From Here?

First and foremost, meal and entertainment expenses continue to be a valid cost of doing business and can continue to be paid for and recorded on the books of your business. The change, and it's a big one, is those costs can no longer be deducted in determining the taxable income of your business.
It will be extremely important for businesses to separately track and account for the six exceptions listed above so that those deductions are not inadvertently lost by lumping them in with the nondeductible meal and entertainment costs.  We can help you and your staff understand the nuances.

In addition, business owners should re-evaluate the importance of meal and entertainment costs as a part of their overall marketing budget. After all, it was the notion of a "three martini lunch" that caused these expenses to become 50% deductible back in 1986. Now that they have become totally nondeductible, savvy business owners will consider where these dollars can be redeployed.

Perhaps these costs should be redirected to a website, an Open House or a stronger social media presence. Instead of sitting still and losing a deduction, maybe this is an opportunity to invest those dollars in a new business and customer development strategy.

Let us know your questions and how we can be of help!