Tax Reform Game Changer - Meal and Entertainment Expense
It's only February 15th (we didn't want to depress you on Valentine's Day) and we're spending as much time with our small business clients (and not so small ones) addressing planning under the new law as we are in preparing 2017 returns. Go figure.
Anyway, here's an Abo and Company "CAN" and "CAN'T" hit list as it relates to business meals and entertainment under the new law effective January 1, 2018 (and, as we've advised whatever clients will listen, go back to 1/1/18 and change your general ledger or whatever record-keeping you employ NOW).
Before we get started, know that, under old law and new law, to deduct business meals (and entertainment before 1/1/18), the activity must be directly related to or associated with the active conduct of a trade or business, or for the production or collection of income. What do these terms mean?
Directly related. You must show that the main purpose of the meal was business, engage in business during the meal and have more than just a general expectation of receiving income or some other future business benefit.
Associated with. You must provide a meal directly before or after a substantial business discussion. Actively participate in a meeting, discussion or other business activity to seek income or some other specific business benefit.
Oh yes, our hitlist:
CAN'T: Deduct entertainment expenses, including activities such as taking a client or a prospect to the theater, sporting events, nightclubs, country or social clubs, concerts, movies, concerts, amusement parks, hunting and fishing.
CAN'T: Deduct expenses for entertainment facilities (yep, that stadium suite goes).
CAN'T: Deduct expenses paid for membership in any club organized for business, pleasure, recreation, or social purposes.
CAN'T: Deduct meals purchased during entertainment activities
CAN'T: Deduct tickets for a sporting event, even if associated with business discussion.
CAN'T: Deduct scalper's premiums for tickets.
CAN'T: Deduct cover charges, taxes and tips for entertainment.
CAN'T: Deduct country club or other social club dues.
CAN'T: Deduct meals with business associates and coworkers (unless you can establish a clear business purpose).
We take little solace in this but employers can deduct 100% of entertainment expenses but only if they include the amount in the employee's taxable wages on his/her W-2 (yeh, you tell that to your employee). So too, if an employer rewards an employee and spouse with a trip and the cost is included in the employee's W-2, the employer can deduct 100%.
CAN'T: Deduct lavish and extravagant portion of a business meal.
CAN'T: Deduct a meal with an employee where no business is discussed.
CAN'T: Deduct a meal with a customer or business associate if no business is discussed.
CAN'T: Deduct a meal with a customer during business travel where no business is discussed (however, while traveling, your meal or the employee's meal will be 50% deductible).
CAN'T: Deduct meals for a customer and spouse if no one else is present.
CAN: Deduct 50% for amounts paid for meals associated with the active conduct of your trade or business.
CAN: Deduct 50% for amounts paid for a meal with an employee where business is discussed, before, during or after.
CAN: Deduct 50% for business meals that are reasonable considering the facts and circumstances and they will not be disallowed just because they take place at deluxe hotels, restaurants, resorts or nightclubs.
CAN: Deduct 100% of an employer's cost of dinner for employees working overtime or lunch ordered in for a staff meeting, if de minimis.
CAN: Deduct transportation to and from the restaurant for a business meal.
CAN: Deduct 50% of the cost of meals provided for the convenience of the employer, such as meals provided to employees who need to be available throughout the mealtime. Alas, before 12/31/17 they were 100% deductible.
CAN: Deduct 50% of expenses related to the business meals such as taxes and tips.
CAN: Deduct fully, including meals, expenses incurred for recreational, social, or similar activities primarily to benefit employees, such as expenses for an annual holiday party or summer outing.
Some 2018 planning thoughts Abo and Company has already started to suggest:
Our business clients and self-employed individuals should remember a few things when reviewing their 2018 meals and entertainment policies. Because the effective date of the law changes is based on expenses incurred after Dec. 31, 2017, the new rules will apply now regardless of your company's year-end. Fiscal year-end clients will need to modify their policies and everyone may wish to assess whether changes to their expense or reimbursement policies are warranted. The burden of proof is on the client, the taxpayer, to establish that a business meal is not an entertainment expense. There is little guidance, but if a meal is determined to be part of an entertainment expense, then such meal will be zero deductible.
Our suggestion? Maximize tax savings and even save time/money on tax return compliance (yep, fees to us) by keeping good records and segregating your general ledger accounts for entertainment expense which is nondeductible, for business meals that are 50% deductible and for recreational/social expenses that primarily benefit employees that would be 100% deductible.
Clients might also want to consider the impact for post 12/31/17 charitable events, sponsorship arrangements and the like. Sponsorship arrangements often include sport tickets besides advertising benefits. Under the new law, the portion of a sponsorship agreement allocable to suites or game tickets will be nondeductible instead of 50% deductible. The remainder of the sponsorship agreement should continue to be deductible as an advertising expense.
Also, the cost of charitable sporting events (such as that charity golf outing that our bud Ron Jaworski hosts at one his courses) typically involves several components: the cost of the golf/meals/cocktails and the charitable contribution for amounts paid over that amount. The cost allocable to golf and meals used to be at least 50% deductible. Effective January 1, 2018, the cost of golf and even the meals are no longer deductible. The charitable contribution component is still deductible.
Promotional events are still deductible as a marketing expense. Thus, we've discussed with business clients that they may brand outings with more advertising to qualify for the deduction. Care should be taken to press the business pitch for the entire duration of the event, not just a few minutes.
Ironically, Marty Abo remembers when he was invited as a participant to the White House Conference on Small Business and for 15 years thereafter asked by the SEC to participate in its annual Government Business Forum on Small Business Formation. Limiting deductibility of business meals and entertainment was always a key recommendation to Congress and the President and limiting such to 50% (and now 100% for entertainment) was always viewed as a major impediment to small business and small business capital formation. Eliminating the entertainment deduction and restricting business meals hurts small businesses that must promote their business by entertaining clients. Personal meetings with existing or potential customers at a restaurant are one of the primary methods of client development for small businesses. We're going backwards, folks.
We have learned that IRS Regulations will be issued that should define "entertainment" more definitively. For a change, we end our alert with..."STAY TUNED".