Article written by:
Jennifer Zimmerman, CPA
Prior to the Tax Cuts and Jobs Act (TCJA) passed in December, companies could deduct 50% of meals and entertainment (M&E) costs incurred, provided that they could establish that the item was directly related to the active conduct of the taxpayer’s trade or business. As a result, many companies combined these M&E expenses into one general ledger account. Under the new law, treatment of many of these expenses has been changed, and businesses should consider making modifications in their general ledger accounts to capture these expenses into different buckets. There are also some less defined areas, where further guidance from the IRS is anticipated.
Entertainment expenses are currently defined as:
- An activity generally considered to be entertainment, amusement, or recreation;
- Membership dues for any club organized for business, pleasure, recreation or other social purposes; or
- A facility or portion thereof used in connection with any of the above items
Even if business is discussed, no deduction is allowed for all forms of entertainment. Examples of entertainment expenses include golf outings, concerts, sporting events, hunting, theater tickets, license fees paid to sporting arenas, golf club dues, etc.
Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business, which begs the question of where the line would be drawn in cases where food and beverage costs are incurred during an entertainment activity. For example, consuming beverages while out on the golf course with a potential client would look like entertainment on the surface. However, pending further guidance from the IRS, it is currently unclear how various types of meals will be treated under the new law. Please click here for a summary of our present understanding of these types of expenses under current and prior law.
It is also worth noting that individual taxpayers who pay for business expenses personally and deduct them through their personal returns, no longer have that benefit under the new law. All miscellaneous deductions, including deductions for unreimbursed employee expenses, are disallowed for 2018 and going forward. Examples of unreimbursed employee business expenses include transportation, travel fares and lodging while away from home, continuing education courses, subscriptions to professional journals, professional uniforms, and home office deductions. Employers may want to revisit their employee reimbursement policies to be sure that the expense is carried by the employer.
There are several exceptions to the limitations above which remain fully deductible. Those exceptions under IRC 274(e) include:
- Expenses treated as employee compensation
- Reimbursed expenses – paid or incurred by the taxpayer in connection with the performance of services for another person or entity, if the taxpayer accounts to such person or entity. This effectively shifts the disallowance of meals and/or entertainment expenses to the person or entity that reimburses the expenses.
- Expenses for recreational, social, or similar activities primarily for the benefit of employees
- Expenses for goods, services, and facilities made available to the general public
Accounting professionals should examine the treatment of their meals and entertainment expenses and consider creating new accounts to capture these differences. Adding new accounts now could help avoid the need to break down accounts later in the year, and most importantly, ensure the maximum benefit by capturing all amounts eligible for deduction. For example, it may be prudent to establish several accounts to mirror the following list:
- Employee business meals (50%)
- Client entertainment meals
- Client business meals
If you have any questions about how the new law will affect your business, please contact your GBQ tax professional.