This is our first in a series of Tax Reform topics. As most of you know, the new law took an axe to some significant M&E deductions.
What We Know
- Most business entertainment expenses are no longer deductible. These would include sporting events, the theater, clubs, golf outings, etc.
- The entertainment activities that survived the cut and remain 100% deductible include the following employer expenses:
- Expenses treated as compensation – entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
- Recreational, etc., expenses for employees – expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
- Employees, stockholder, etc., business meetings – expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50%);
- Meetings of business leagues, etc. – expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade that are exempt from taxation under section 501(a) (here, the law also limits expenses for food and beverages to 50%);
- Items available to public – expenses for goods, services, and facilities you or your business make available to the general public;
- Entertainment sold to customers – expenses for entertainment goods, services, and facilities that you sell to customers; and expenses paid on behalf of nonemployees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.
- Employee meals that were 100% but are now 50% deductible include:
- meals served at required business meetings on your business premises;
- meals served at required business meetings in a hotel or other meeting place that passes the test for business premises but is located outside of the office;
- meals served to employees who are required to staff their positions during breakfast, lunch, and/or dinner times; meals served to employees at in-office cafeterias;
- food and meal costs for employees who are required to live on premises for the convenience of the employer.
- Meals related to out of town business travel remain 50% deductible.
What We Don’t Know (with certainty, yet)
The CPA community is mixed on whether the elimination of the deduction for entertainment expenses applies to business associate, referral source, client, customer, prospect, etc. business meals. We believe the answer is that these meals are no longer deductible with Tax Reform. The deduction of these types of meals and any related or unrelated entertainment was provided for via IRC Sec 274(a) and the language allowing for those deductions has been removed.