The new Tax Cuts and Jobs Act (TCJA) can be confusing for many– especially small business owners. Although many aspects of the TCJA have been discussed, one component of the tax law that has not received much attention deals with significant changes to meals and entertainment deductibility.
In the past, taking a client to a football game or bowling alley was 50% deductible. Under the new tax law, a business cannot deduct any portion of this expense. Holiday parties and staff appreciation celebrations are still fully deductible, but staff meetings are no longer 100% deductible. For example, catering a lunch-time staff meeting can no longer be considered a fully deductible “employee expense.” Meals at a convention or conference and recruiting-related meals are still 50% deductible. The chart below highlights the nature of these different deductions:
|Expense||Prior Rule||New Rule|
|Holiday Parties||100% Deductible||100% Deductible|
|Birthday Celebrations||100% Deductible||100% Deductible|
|Staff Appreciation||100% Deductible||100% Deductible|
|Staff Meetings||100% Deductible||50% Deductible|
|Meals for Convenience of Employer||100% Deductible||50% Deductible|
|Convention and Meeting Meals||50% Deductible||50% Deductible|
|Client Entertainment||50% Deductible||No Deduction|
Perhaps the most noticeable impact this new rule will have on your business is not related to the tax deductibility, but to the additional accounting distinction that will need to be made between meals and entertainment. Those two expenses have been linked for such a long time that accounting for meals and entertainment in two different ways could be tricky. Complicating matters is the number of employees and executives that are unaccustomed to making the distinction.
Also, additional consideration will need to be given when there is some gray area between meals and entertainment. For example, some restaurants offer entertainment along with meal presentation. Does any distinction need to be made between the two components of that event? In another example, if you take a client out for an evening of bowling at a fancy bowling venue, and you order heavy appetizers for the group, does the invoice need to be split between the entertainment and meal components? Or, does the presence of food move everything into the 50% deductible column?
More guidance is likely to be published by the IRS in coming months, so stay tuned for that. In the meantime, our recommendation would be to track both meals and entertainment expenditures in good detail and with documentation, so the appropriate determinations can be made once that clarification is available.
If you have questions about the new tax laws, would like more information about what you can and can’t deduct, or would like to request a speaker on this topic for your organization or event, contact a PYA executive below at (800) 270-9629.
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