Those planning to discuss business at the next tailgate, or talk shop over eighteen holes with the intention of writing off the expense on this year’s tax return, need to think again. In the IRS’s latest notice on the Tax Cuts and Jobs Act (TCJA), changes to Internal Revenue Code (IRC) Section 274 regarding meals & entertainment, entertainment expenses are strictly off the menu. That’s right. No longer is a 50% deduction allowed for business activities which constitute entertainment, amusement or recreation. This means those season tickets, those greens fees, and even what few club dues were previously allowed, are gone.
Additionally, the ambiguous phrase “but technically, this could be classified as…” argument is addressed by an Objective Test which further excludes a deduction for an activity which is “generally considered” to be entertainment. This is regardless of whether the same activity could also be described otherwise, as, for example, public relations or marketing.
Now, the type of your trade or business is certainly a factor in determining the deductibility of such expenses. In other words, a film critic can, generally speaking, deduct the expense of a ticket for a film he is critiquing. This is not the case for the orthodontist entertaining a client in the same audience. But not all is lost.
Notice 2018-76 published in October provides some clarification as to the deductibility of the meal expenses associated with entertainment activities. A deduction for items meeting the following five criteria is still permitted
at 50%:
- The expenses are ordinary and necessary
- The expenses are not lavish or extravagant under the circumstances
- The taxpayer, or taxpayer’s employee, is present where the food and drink are furnished
- The meals are provided to a current or potential business client
- Food and beverage must be purchased separately from the entertainment, or “stated separately on one
or more bills, invoices or receipts”
Furthermore, food and beverages furnished on business premises and provided by (and for the benefit of) the taxpayer are still deductible at the full amount, at least until further guidance is issued.
So what does it all mean?
- If an account in your general ledger is titled Meals & Entertainment, reconsider how these expenses are tracked and break out Meals into a separate account from Entertainment.
- Consider what information is collected from employees submitting reimbursement requests, and the amount of detail that is being collected.
This is not just to make things easier on your beloved accountants, but to ensure the substantiation of the deduction allowed, while maximizing the benefit received under this new legislation. For more information or to discuss related planning opportunities, contact Clayton & McKervey.
