The Tax Cuts and Jobs Act (TCJA) has enacted sweeping change for business owners, not the least of which is the deductibility of meals and entertainment expenses. After December 31, 2017 the TCJA eliminated the deduction for business-related entertainment expenses and greatly limited the deduction available for meals. This article takes a general look at the changes for each category and the necessary record-keeping that must change as a result of the new laws.

Entertainment

Since the TCJA eliminated the deduction for entertainment expenses and any meals purchased during entertainment activities, many previously common expenses can no longer be taken such as:

  • Taking a client or a prospect to a sporting event
  • Tickets for theater, movies, concerts or amusement parks
  • Entertainment facilities (i.e. stadium suite or skybox)
  • Membership fees for any club organized for business, pleasure, recreation or social purposes

Entertainment deductions that are still allowed to business owners are severely limited and include:

  • Entertainment expenses, including meals, incurred for recreational, social or similar activities primarily for the benefit of employees (i.e. holiday party or summer outing)
  • Expenses included in employee W-2 wages
  • Entertainment expenses paid under certain reimbursement arrangements

Meals

Generally speaking, businesses are allowed a fifty-percent (50%) deduction for meal expenses associated with the active conduct of the taxpayer’s trade or business. However, the TJCA changed the definition of a “business meal”, restricting it in some cases while expanding it in others. Here are how things look to be under the new TCJA:

  • Meals with clients, customers or prospects that occur during an entertainment activity (i.e.: while at a sporting event or concert) are nondeductible
  • Meals with clients, customers or prospects during which there is substantial business discussions are 50% deductible (without substantial business discussion they are nondeductible)
  • Meals provided for the convenience of the employer at the employer’s location, such as dinner provided to employees while working are 50% deductible through December 31, 2025; after that date they will be nondeductible
  • Reimbursements to employees for meals while traveling on business are 50% deductible
  • Free meals to employees provided by an on-site dining facility (i.e. cafeteria) are 50% deductible through December 31, 2025; after that they will be nondeductible
  • Holiday party or similar events for employees are 100% deductible

Sponsorships and Charity Events

Businesses should also be aware of how these changes impact their participation in sponsorship arrangements, charitable events and other similar activities.

If a sponsorship arrangement includes game/event tickets and or stadium suites/boxes in addition to the advertising benefits, the portion that is allocable to the fair market value (FMV) for the use of the tickets and suites are nondeductible. The remainder of the sponsorship agreement will be fully deductible as an advertising expense.

Likewise, charity event expenses are generally made up of two components:

  1. The FMV of the dinner, golf round, concert ticket, etc. which is nondeductible
  2. The charitable contribution for amounts paid in excess of the FMV received which is deductible

Example: A business participates in a charity golf outing by sponsoring a tee for $2,500. The tee sponsorship includes a corporate sign on the applicable green as well as tickets for a foursome to participate in the event. Event tickets indicate the FMV of the round of golf is $100. In this case, 4 x $100 or $400 is nondeductible entertainment expense and $2,100 is fully deductible as advertising.

Substantiation Requirements

While there has been no change in the rules regarding substantiation of expenses, it will become even more important to document the business purpose of the activity, participants, amount and date of the event. Because there are different tax treatments for different type of expenses (as outlined above), documentation procedures may need to be expanded to ensure correct treatment. Businesses should also consider updating their general ledger account to reflect these changes. Instead of having one account for Meals & Entertainment, new accounts should include:

  • Nondeductible entertainment expenses
  • Employee events and meals – 100% deductible
  • Meals – 50% deductible
  • Nondeductible meal expenses

For more information please contact Ellen Marvin at Ellen.marvin@SobelCoLLC.com