By Bryan Freshcorn, CPA, Tax Manager
*Note: On October 3, 2018, the IRS issued Notice 2018-76 providing “transitional guidance” to taxpayers regarding business meals.
The Tax Cuts and Jobs Act brought substantial changes to the deductibility of entertainment, amusement or recreation expenses (“entertainment expenses”). Before 2018, entertainment expenses directly related to or associated with the active conduct of an income-producing activity were generally 50% deductible.
Beginning in 2018, expenditures for business entertainment are no longer deductible regardless of purpose. Presumably, Congress felt that the reduction in income tax rates would more than offset the loss of the entertainment deduction. The effect, however, will be uneven from company to company and the impact could be much more profound for those in the business of providing entertainment, if businesses choose to reduce participation at these events. For example, taking a client to a concert or sporting event may have a much larger after tax cost compared to taking them to dinner.
Business meals and employee travel meals remain deductible at 50%. Employee meals provided for the convenience of the employer at its premises, plus “supper money” given to employees who occasionally have to work late, are no longer entirely deductible. Instead, they are also only 50% deductible.
Luckily, for qualified “company outings” which are occasional and available to all employees, which might include an athletic event, a holiday party at the club, or a golf outing remain 100% deductible. Remember, though, that invitations should go to the all employees and not just executives or a select few.
One thing to keep in mind for your recordkeeping
Do not just use that “meals and entertainment” account on your income statement any longer. It did not matter before, but because business related meals are now 50% deductible but entertainment is not, you will want to have at least two accounts, and preferably a third for your company events.
Clarification needed on the new rules
One caveat on these new rules is that there are some uncertainties in them, so there will need to be additional guidance from the government on these new rules. On January 25, Veena Murthy, legislation counsel for the Joint Committee on Taxation, said that the Tax Act changes related to entertainment-related expenses — especially meals — was one of the issues that had been eliciting the most questions. “Murthy said there’s still a 50 percent deduction permitted for meals. ‘That is generally still the case. There’s been a lot of confusion on that,’ she said. ‘However, meals that are considered entertainment — whatever that means — are no longer deductible'”.
She also addressed confusion on fringe benefits. A working condition fringe benefit is “any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowable as a deduction.” However, Murthy noted that miscellaneous itemized deductions were suspended under the new law. “The question then is, does that somehow imply that working condition fringes are no longer excludable? The answer is that was not the intention,” she said.
Hopefully, we will get additional answers and clarification soon. The Keiter team is monitoring tax news and updates closely. We will keep you informed of changes and planning opportunities.
Additional Tax Planning Resources:
- AMT Changes to Individuals and Businesses
- Tax Reform Bringing Changes to Business Tax Planning
- Tax Cuts and Jobs Act: What you need to know about the Estate, Gift & Trust Provisions
- IRS Directives for International Examiners on Important Transfer Pricing Issues
- Changes to Capital Gains Taxes in 2018
- 529 Plans: Benefits and New Tax Incentives
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.