In the past, business-related meals and entertainment expenses incurred in the normal course of business were deductible up to 50% of the expense. But with recent tax law changes put into place by the Tax Cuts and Jobs Act, entertainment expenses are off the table! If you are hungry for information about the 2018 changes to meals and entertainment, read on to find out more about them, their exceptions, and how they may affect your business.
For years, businesses have been allowed to deduct anywhere from 50%-100% of meals and entertainment expenses. However, the Tax Cuts and Jobs Act changes the deductibility of these expenses, and makes it critical for businesses to categorize the different types of meals and entertainment expenses for accounting and tax purposes.
There are four relevant meals and entertainment categories: office parties including birthdays, anniversaries and special occasions; entertainment for clients; business meals/employee travel meals; and meals provided for the convenience of the employer. Every business will typically incur expenses related to one or more of these categories in a given year. Therefore, the big question is: what changes have been made?
Office parties continue to be 100% deductible for 2018 and onwards. These expenses provide recreational, social, or other similar activities for the benefit of employees. Expenses for these activities should be primarily for employees who are not highly compensated (generally defined as those who make $120,000 or more per year). Additionally, they should not be extravagant in relation to the size of your business. In other words, they should be a small percentage of your business expenses.
Under the old rules, expenses for entertainment paid on behalf of clients were 50% deductible. Under the new rules, no deduction is allowed for these expenses. Expenses in this category include live entertainment, event tickets, and any other expense paid for the entertainment of clients. Also included in this category are tickets to qualified charitable sporting events. As of January 1, 2018, if meals are included in the charitable sporting tickets prices, then the meals are deductible at 50%, whereas the cost of the tickets themselves are nondeductible.
Business Meals (Employee Travel Meals):
More good news for businesses – business meals are still 50% deductible. Business meals are expenses for meals that directly relate to the active conduct of the trade or business. Often, items in this category are those incurred by employees during their business-related travels and meals with clients.
Meals Provided for the Convenience of the Employer:
This category includes on-premise cafeteria meals or meals for employees who staff positions during meal times. They are considered a convenience to the employer because it benefits the employer to have the employee on site and available to work during these specific times. In the past, expenses in this category were either 100% or 50% deductible depending on whether or not they were taxable to the employee. Now expenses in this category are 50% deductible across the board. As these meals benefit the employer, the new tax law allows them to remain partially deductible on the grounds that they are essentially a business expense. However, these expenses will become nondeductible after 2025.
Meals and entertainment expenses are common in the ordinary course of business, and as usual, the tax laws surrounding them are more complicated than they may seem. If you have any questions related to the tax law changes surrounding the treatment of meals and entertainment expenses, or if you would simply like more information, please feel free to contact our office at (858) 558-9200.