Accounting

Understanding New Rules Regarding Business Entertainment Deductions

March 14, 2018

If you own a business or work in a business, chances are that at some point, you’ve engaged in business-related entertainment of some sort. If so, you’ve probably reported those entertainment expenses as deductible on your taxes. While the recently passed Tax Cuts and Jobs Act of 2017 (the Act) has far-reaching impacts in many areas of tax law, one of those areas is business-related entertainment expenses. The reality is, the rules around entertainment expenses have changed—and if you or your business engages in business entertaining of any kind, it’s important you take note.

What’s changed?

In general, the Act provides for stricter limits on the deductibility of business meals and entertainment expenses. Under the Act, entertainment expenses incurred or paid after Dec. 31, 2017 are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.” As an example, office holiday parties are still deductible. Business meals provided for the convenience of the employer are now only 50 percent deductible, whereas before the Act, they were fully deductible. Barring further action by Congress, those meals will be nondeductible after 2025. Businesses should keep the new rules in mind as they plan their 2018 meals and entertainment budgets. See below for a list comparing the rules before and after the Act.

Recreational Expenses for Employees (e.g., Christmas parties, annual picnics, or summer outings intended for employees generally)

2017 Expense (Old Rule): 100% deductible
2018 Expense (New Rule): 100% deductible

Entertaining Clients (Meals include food or beverages including beverages or drinks served apart from meals of the taxpayer and his business associates at a cocktail lounge or hotel bar not involving distracting influences such as a floor show Re. § 1.274-2(f)(2)(i)(b)

2017 Expense (Old Rule): Entertainment & meals – 50% deductible
2018 Expense (New Rule): Meals – 50% deductible

2017 Expense (Old Rule): Event tickets, 50% deductible for face value of ticket; anything above face value is non-deductible
2018 Expense (New Rule): No deduction for entertainment expenses

2017 Expense (Old Rule): Tickets to qualified charitable events
- Meal portion, 50% deductible
- Remaining portion 100% deductible
2018 Expense (New Rule): Same as 2017

Employee Travel Meals

2017 Expense (Old Rule): 50% deductible
2018 Expense (New Rule): 50% deductible

Meals Provided for Convenience of Employer

2017 Expense (Old Rule): 100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits, otherwise; 50% deductible
2018 Expense (New Rule): 50% deductible (nondeductible after 2025)

What steps should your company take?

Review and revise your corporate entertainment policy as needed.

Company officials should review changes to the deduction disallowance with a qualified tax professional and amend this policy accordingly. Expenses must be “ordinary and necessary” in carrying on taxpayer’s trade or business and the taxpayer must show the expense was either “directly related to” or “associated with” the “active conduct” of such trade or business.

Directly related – active business discussions or meetings
Associated with – expense incurred directly preceding or following active discussions (same day or facts and circumstances test) Reg. §1.274-2(d)(3)(ii)
For record keeping, need amount, time, place, business purpose and business relationship

Establish specific general ledger accounts.

In order to easily identify how to treat various expenses during tax return preparation time, separate accounts should be established for three primary purposes:

To identify entertainment expenses that do not qualify for the business deduction
To identify those that fall under the 50 percent deduction limit
To identify those that are subject to a 100 percent deduction

Consider the inclusion of entertainment expense reimbursements in taxable wages.

In order to preserve the deductibility of the entertainment expense under compensation expense, consider including these amounts in the employees’ taxable wages. In addition, these wages can be “grossed up” where federal income tax and FICA taxes may be paid on behalf of the employee.

Services

Industries

News & Insights

Are You Prepared? Financial Access Checklist for Spouses

Services

Resources

What is a Comprehensive Risk Assessment?

Business Insights

Top 3 Financial KPIs Every Business Owner Should Track

Services

Resources

NEWS & INSIGHTS

Financial Market Updates

Services

Resources

7 Factors to Consider Before Selling Your Business

Business Insights

Key Items to Review During Financial Due Diligence

Services

Candidate Resources

News & Insights

5 Benefits of Using Gallup's StrengthsFinder in Your Company

Services

Resources

Introducing Data Analytics into Your Business

Business Insights

17 Tech Tips & Tricks

Business Insights

Webinars & Events

Lutz Talk Business

Resources

Business Insights

About

Understanding New Rules Regarding Business Entertainment Deductions

What’s changed?

Recreational Expenses for Employees (e.g., Christmas parties, annual picnics, or summer outings intended for employees generally)

Entertaining Clients (Meals include food or beverages including beverages or drinks served apart from meals of the taxpayer and his business associates at a cocktail lounge or hotel bar not involving distracting influences such as a floor show Re. § 1.274-2(f)(2)(i)(b)

Employee Travel Meals

Meals Provided for Convenience of Employer

What steps should your company take?

Review and revise your corporate entertainment policy as needed.

Establish specific general ledger accounts.

Consider the inclusion of entertainment expense reimbursements in taxable wages.

Recent News & Insights

Lutz adds Baker and Reinholz

Lutz Tech adds Agraz and Gasper

Nebraska + Iowa Enact Pass-Through Entity Tax Laws

A Few Large Growth Stocks Have Driven the Market in 2023 + Market Update

Let’s get you where you want to go.