The Tax Cuts and Jobs Act (TCJA) made significant changes to the tax deductibility of meals and entertainment, effective January 1, 2018. The stricter limits on meals and entertainment will require companies to update their accounting policies.
Before enactment of the TCJA, entertainment was 50% tax deductible as long as there was a substantial and bona fide business purpose. The TCJA does not allow a tax deduction for any item “with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation.” This change eliminates entertainment expenditures, such as event tickets and country club dues, as well as meals related to entertainment, such as meals consumed at a golf course or a sporting event.
All other business meals are 50% tax deductible under the TCJA. Before the TCJA, some meals were 100% tax deductible. For example, meals provided to employees for the convenience of the employer previously were 100% tax deductible. Those meals are now limited to a 50% tax deduction.
In summary, the following business meals are 50% deductible for tax purposes:
- Employee travel meals (all meals during business travel)
- Meals at a seminar or conference
- Meals connected to meeting with customers or clients
- Any other meals provided for the convenience of the employer
The following expenditures will be 100% deductible for tax purposes:
- Office holiday parties
- Company picnics
- Expenses included as taxable compensation to employee
- Expenses to be reimbursed by the customers or clients
Keep in mind that many states, including California, have not conformed to these new rules, so entertainment is still 50% tax deductible for states that have not yet conformed. This means that there will be more federal to state differences on those tax returns.
Lastly, this is a great opportunity to review expenditure policies to minimize the negative impact of the new limitations. Before the TCJA, it was not crucial to distinguish between entertainment and meal expenses because, in most cases, they were all 50% deductible. Now, they should be categorized separately, so that it is easier to identify the 50% deductible meals vs. the non-deducible entertainment. There is also a need for accounts for expenditures that are 100% deductible, for example office holiday parties, company picnics, etc.
If you have questions or would like more information, please contact Jim Wilde at firstname.lastname@example.org or 844.4WINDES.