Business Tax Reform: Meals and Entertainment Deductions

The new tax reform act has a number of material changes for individuals and businesses. Some of which have been highlighted in the news and you may be well aware, but given it is being labeled as the ‘largest tax reform in 30 years’ you may not be aware of some of the other significant changes which could impact you come tax time next year.

One of these changes is putting in place stricter limits on the deductibility of business meals and entertainment expenses. The Tax Cuts and Jobs Act essentially killed deductions for entertainment related expenses unless they are “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees”. So, the office Christmas party should still be deductible as well as company family day at the park, but what about owner-employee outings or taking clients out to a basketball game, golf outing or dinner and drinks? Those related to owner-employees only or direct for client entertainment are most likely no longer deductible.

Why be concerned? Even if you aren’t in a business that spends heavily on customer, client or networking expenses you may still be surprised come end of 2018 when your company books and your tax return seem to be off quite a bit. If you showed it as an expense during the year and that reduced cash available and income on your books it doesn’t mean that it was truly deductible and instead it could come back as an owner distribution that you have to pay taxes on. Not good.

What to do? Discuss with your advisor and make sure you understand if your planned spending in these areas will be deductible and avoid the surprises. Need more strategic planning or have unanswered questions? Give us a call.

Changes Summary:

Expense Type Old Law New Law
Office Holiday Parties 100% Deductible 100% Deductible
Entertaining Clients 50% Deductible No Deduction
Business & Travel Meals 50% Deductible 50% Deductible
Event Tickets 50% Deductible No Deduction
Charitable Event Tickets 100% Deductible No Deduction

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