Before the federal tax overhaul, business meals and entertainment were generally deducted at 50 percent. Now, meals remain generally 50 percent deductible. Entertainment does not.
The changes are only to select expenses, but some companies were taking large deductions to entertain clients, which could impact their taxable income.
“This affects everybody from a sole proprietorship to a large multinational company,” says Melissa Knisely, CPA, Tax Department Senior Manager at Ciuni & Panichi, Inc. “We’ve known about the changes and have made clients aware. The recent guidance has enabled us to clarify some of the previous unknowns.”
While this change under the Tax Cuts and Jobs Act (TCJA) was effective Jan. 1, 2018, the IRS recently provided some interim guidance while we wait for proposed regulations.
Smart Business spoke with Knisely about what taxpayers need to consider with the revised meals and entertainment deduction, including interim guidance from the IRS.
What exactly will need to be treated differently and what remains the same?
The two exceptions allowing entertainment to be deductible were repealed as of Jan. 1, 2018. So, all entertainment, amusement or recreation activities are now nondeductible. Theaters, clubs, lounges, tickets for sporting events, skyboxes, transportation to and from sporting events, cover charges, taxes, tips and parking for entertainment events would all be considered part of entertainment, amusement or recreation.
The TCJA clearly addressed entertainment, but meals were not specifically addressed. Recent interim guidance from the IRS did, however, provide some clarity. Business meals can continue to be deducted at 50 percent, provided they meet five qualifications:
1. The expense is an ordinary and necessary business expense paid or incurred during the tax year when carrying on any trade or business.
2. The expense is not lavish or extravagant.
3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished.
4. The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
5. For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages are stated separately from the cost of the entertainment on one or more bills, invoices or receipts.
This last point is particularly important. It means if the meal is part of the entertainment, such as a baseball game, taxpayers must pay for the entertainment separately. In cases where the food is included with the ticket to the game, the food would only be deductible if separately stated on the ticket or invoice.
What are companies doing now to comply?
It’s mostly a matter of understanding what’s happening and then making sure it’s being accounted for in such a way that it is easy to determine what is deductible for tax purposes and what is not.
In the past, businesses had one trial balance account for meals and entertainment. Now, they need to review their 2018 activity to ensure that food and beverage is stated separately, while recording invoices to two separate accounts — one to meals, one to entertainment.
How are calendar and fiscal year filers handling this differently?
If you have a business that is a calendar year-end filer, you’ll follow the new rules for the entire 2018 calendar year. If you have a business that follows a fiscal year end, you’ll follow the old rules for the portion of the year that falls in 2017 and you’ll follow the new rules for the portion of the year that falls in 2018.
What else is on the horizon for meals and entertainment deductions?
Currently, there’s a 50 percent deduction for meals for employees’ benefits, such as coffee, doughnuts, overtime meals or occasional group meals, as well as the expenses of an employer-operated eating facility. In 2026, if nothing changes, food at the office won’t be deductible. This will be something companies should keep an eye on.
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