Business owners will have to take a hard look at business related meals and the cost of entertaining an existing or potential client under Tax Reform. The Tax Cuts and Jobs Act of 2017 sought to further limit the deductibility of some meals and most entertainment expenses, but some important exceptions still apply. Because the effective date of the law change is based on expenses incurred after Dec. 31, 2017, the new rules apply now without regard to the company’s year-end. Fiscal year taxpayers therefore will need to adjust their policies.
Misconceptions about meals abound, but tax saving opportunities still exist!
The TCJA completely eliminates the employer tax deduction for substantially all directly paid or reimbursed business entertainment expenses. This would include activities such as taking a client or a prospect to sporting events, the theater, movies, concerts, country clubs or for expenses related to a skybox or stadium suite for example. Even contributions to an education institution to purchase tickets to an athletic event are now considered a non-deductible item.
The 50 percent limitation for business-related food and beverage expenses applies now to include food and beverages provided to employees through an eating facility, as well as other employer provided de minimis food and beverages at the workplace (such as coffee and donuts, working meals and overtime meals) unless they are served as part of an event that would fall under the employee recreation exception.
So when should a business meal with a client be treated as entertainment or as a as a 50% deductible meals expense meal under tax reform in 2018? Use this as your guide:
- If the meal involves a business owner or employee and a current or prospective client;
- Takes place at a restaurant and not an entertainment venue, club or sports facility;
- Would not be considered lavish or extravagant;
- There is an expectation of deriving income or some other business benefit from the meeting.
- Provided on employer business premises to the employees for the convenience of the employer (non-deductible after 2025),Occasionally provided to the employees for weekend work or overtime,
- Office snacks and beverages provided to employees on business premises, or
- Part of a package for a charitable sports event
The deduction for expenses associated with providing any qualified transportation fringe benefit, including for commuting between the employee’s residence and place of employment, would be disallowed, except as necessary for ensuring the safety of the employee.
To summarize, examples of fully deductible expenses 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, and
- dExpenses includable in income of persons who are not employees.
It still pays to be charitable:
Businesses also should consider the impact of tax reform on sponsorship arrangements and charitable events. These often include suites or game tickets in addition to advertising benefits. Under the TCJA, the portion of a sponsorship agreement allocable to suites or game tickets will now be nondeductible BUT the remainder of the sponsorship agreement will continue to be deductible as an advertising expense.
Keep in mind, the cost of charitable sporting events like a charity golf tournament typically involves two components: 1) the cost of the golf and meals, and, 2) the charitable contribution paid to the non-profit in excess of that amount. Beginning in 2018, the cost of meals and golf will not be deductible, however the charitable contribution will continue to be deductible.
Steps to take now:
Re-examine and re-categorize your plan for business expenses. We suggest the following categories:
- Non-deductible
- 100% deductible
- Non-deductible
- 50% deductible
- 100% deductible
Since the new tax law was passed at the end of 2017, there was not a lot of time to implement these changes. This may require you to go back and clean up the records of expenses already paid or incurred, and properly classify them for preparation of your tax return. You also may need to revise expense reporting systems to accommodate the new tax law.
It is now especially important to maintain proper documentation to substantiate any expenses that qualify for deductions showing the amount, time, date and place of expenditure; business purpose; and business relationship of the persons entertained. The IRS may examine such records during an audit.
Planning tips:
Meals and entertainment play a critical role in networking and business generation activities for most businesses. It is important to understand the new treatment of expenses to ensure they are properly categorized, documented and deducted, to avoid lost tax savings. Not every scenario or change or exemption has been examined in this article, and we are awaiting additional guidance from the IRS as well. The elimination of the entertainment expenses including entertainment-related meals needs to be a part of the broader conversations with your Fuoco Group professionals about changes needed under the new tax law. It may be that losing some of the entertainment-related expense deductions will be offset by reduced corporate tax rates and the new 20% qualified business income deduction for pass-through entities. Fuoco Group’s tax experts can assist in evaluating tax reforms overall impact on your business. Got questions? We have answers. Contact us at 855-534-2727.