Entertainment Expense is GONE With Tax Reform
Updated: Apr 1, 2021
No, you aren't imagining this. It's true.
As part of the Tax Cuts and Jobs Act, entertainment expenses are no longer deductible against business income. Say goodbye to expensing happy hours after work with co-workers, or even clients. Say goodbye to expensing front row seats at the ball game with prospects you're trying to close. This applies to everyone. Sole proprietors, LLCs, S-Corporations, and C-Corporations. How does this work?
I'll give you an example: Jim is a paper salesman for Dunder Mifflin. He takes one of his clients, Pam, golfing and out to lunch to discuss their new paper products. Write off?
If the meeting occurred in 2017, absolutely! 50% deduction
In 2018....no!! And arguably the meal isn't a write-off either
The meal they ate is considered "dining out with others" and this is deemed entertainment in the eyes of the IRS. Dining out with others is no longer an allowable deduction in 2018. In 2017, the meals and entertainment deduction was alive and well. As long as the expense was related to, or associated with conducting your business, you were allowed a deduction for meals and entertainment expenses. The level of deduction varied, however. In 2018 businesses need to be mindful of the changes in the tax law and how it may affect their day-to-day operations. Let's talk details:
Dining out with others - for instance, you take a client out to eat after work one night. You have some drinks, some cheese fries, and your entrees. All of this was 50% deductible in 2017. In 2018, this is gone under the entertainment rules.
Dining by yourself - ONLY when you are traveling for business are you allowed to deduct personal meals. Dining by yourself in a restaurant at the bottom floor of your office building would not fall under this 50% deduction category. This deduction is still intact for 2018 ONLY when traveling outside of your normal commute.
Holiday parties/team events - in 2017, these could have been classified as required business team meetings. Whether or not it was at a restaurant, you could arguably write off the entire expense. In 2018, this could be considered entertainment, and in that case...0% deduction. If this event or party is a required business meeting and a presentation is given beforehand, then this would be an allowable business expense and 50% would be deductible against your business income.
In some cases, business owners were allowed a full deduction for certain meal related transactions.
A required meeting with employees in the office where food is brought in...100% deduction for that food in 2017 and years prior. In 2018, only 50% of the expense is deductible.
You have a cafeteria at your office and pay for the food for your employees, 100% deductible in previous years. Now, in 2018, only a 50% deduction is allowed.
All of the food in the fridge, coffee and snacks in the kitchen were all 100% deductible in 2017 and years prior. In 2018, only a 50% deduction is allowed.
If food is brought to a project site or in the office where the business operates ("business premises"), in 2017 100% of the expense was deductible in some cases. In 2018, a maximum of 50% is allowed.
These were the golden days. Business owners were allowed either a 50%, or, in some cases, a 100% deduction for certain meals and entertainment related expenses. Think about all of the business that happens on the golf course, or at that ballgame, or even at happy hour after work. You can certainly still operate this way in 2018, but keep in mind, you won't be able to submit that receipt to your accountant for the 50% tax deduction. The cost of doing business just increased dramatically with the tax reform.
Sure, there is the 20% deduction for flow-through entities, and the new 21% corporate tax rate, but, the entertainment line item on income statements is gone. Not to mention, the entertainment industry is likely to take a HUGE hit in 2018.
Sure, the Apple's and Google's of the world may still maintain their season ticket positions for employees and clients (because they can), but, smaller companies that relied on the tax breaks associated with entertainment expenses are now more likely to eliminate these outings completely.
Stay tuned as we see the implementation of the new law. As audits occur and court cases happen, we will have a better understanding of the ramifications handed out and the loopholes people will find. Be mindful of the new tax law and make sure to keep track of the expenses that still qualify for the meals deduction. It's not completely gone! Yet...
If you're unsure if certain expenses are still deductible, be sure to consult with your accountant. If you don't have an accountant, feel free to shoot me a message with any questions you may have. firstname.lastname@example.org
Here's to making money and KEEPING that money!