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Changes to Business Entertainment Expense Deductions

By Eileen M. Stevens, CFP®

 

The introduction of the Tax Cuts and Jobs Act in December 2017 brought many areas of uncertainty, some of which are only being clarified over time as the IRS releases further explanation. One such question is how businesses treat deductions.

Prior to 2018, businesses could deduct a variety of expenses associated with attracting new clients or maintaining relationships, such as a client appreciation event. Under the new tax law, expenses related to “entertainment, amusement, or recreation” are no longer deductible, but food expenses are. This change effectively eliminates the ability to write off any expense or portion of a client appreciation event which is not food—even if it is directly related to the conduct of business. such as renting an event space—membership dues to a club, etc.

How much of the meal is deductible?

Meals are deductible up to 50% of the food and beverage expense if the following five stipulations are met:

1. The expense is an “ordinary and necessary expense” paid or incurred during the taxable year related to your business. The IRS considers ordinary and necessary expenses as commonly accepted, and helpful towards conducting your work.

2. The expense is not lavish or extravagant under the circumstances

3. Either the business owner or at least one employee of the taxpayer, is present at the time the expense is incurred.

4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact

5. If food and beverages are provided at an entertainment activity, the food and beverages are either purchased separately from the entertainment, or the cost is recorded separately from the cost of the entertainment (i.e., separate invoice/receipt.)

Note: you are not allowed to inflate your food expense deductions to cover your accompanying entertainment expenses.

For example: In years past, you took your clients out each year to a dinner and a show and were able to deduct all expenses associated with this event. In 2018 and forward, your dinner may be deductible, but the “entertainment” aspect of the show is not. Further, your meal will not be deductible unless you purchase the food separately from the show— it is a good idea to request separate receipts for record keeping.

Activities that are newly constrained to the 50% deduction (until 2025, at which time they will become nondeductible):

  • Meals for employees at the convenience of the employer (such as served to employees when working overtime)
  • Any meals provided in a company cafeteria or dining room
    (Thankfully, the meal served at your holiday party is still 100% deductible!)

How do I deduct my sponsorship of an event?

To be deductible, the expense must be broken down into the following categories:

1. Entertainment fair market value (FMV): non-deductible
2. Meal: 50% deductible if separately stated
3. Remainder: charitable contribution if you received nothing back; otherwise, the cost would be deductible as an advertising expense

What if food IS my work?

It’s important to note that the type of business you run can determine whether an activity is classified as “entertainment” or a fully deductible business expense.

Example: For a restaurant critic who is paid to eat and review the food, the cost of a meal is not limited to 50% but is a 100% deductible business expense.

My food costs fit the criteria, now what?

Your options are to either:

  • Deduct against the actual costs for meals
  • Use the standard IRS meal allowance

With either method, you must still maintain copies of receipts. You can look up the standard meal allowance (called the “Meal and Incidental Expense” rate (M&IE) for your city in IRS Publication 1542 (Per Diem Rates) (PDF) [In addition, consider consulting a CPA regarding which deductions you are eligible to take.]

What is the impact of this new rule?

Eliminating the tax deduction for hosting events at businesses such as golf courses, theaters, and sport arenas is likely to cause employers to reevaluate their business budgets. The entertainment industry and sales professionals who rely on hosting events to win new business will certainly begin to feel an effect as employers decrease spending.

 

 

Eileen M. Stevens, CFP®, is a 2014 graduate of Virginia Tech with a B.S. in Business, where she majored in Finance with a financial planning concentration. She joined Abacus in June of 2014 and earned the CFP® designation in June of 2016. Eileen earned the EA designation in January of 2017.

 

Abacus

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