The Tax Cuts and Jobs Act (“TCJA”), which was enacted on December 22, 2017, is the largest piece of tax legislation passed since 1986. The majority of the media coverage surrounding this law has focused on the changes in tax rates and property tax limitations. For businesses, there are a number of changes that are now in place. One such change is the deduction of business meals and entertainment.
First, let’s discuss the old rules. The general rule denied as a deduction all expenditures of a type for entertainment, amusement, and recreation (“E, A, and R”), which could include food and beverage, unless such expenditures were directly related to, or associated with, the taxpayer’s ordinary trade or business. If a taxpayer could establish the expenditures as directly related to or associated with his trade or business, the old law allowed 50% of such expenditures as deductions. For example, a business executive could take clients to a sporting event, and the company could deduct 50% of the cost of the tickets as an entertainment deduction. Now, let’s contrast the new rules. The “TCJA” simply denies a deduction for expenditures for “E, A and R” which could include food and beverage. Such expenditures are now 100% non-deductible for years after December 31, 2017. For example, expenses incurred taking a client or prospective customer/client to lunch would no longer qualify for a deduction.
As with any general rule, there are exceptions. One common exception, in both prior law and the “TCJA”, to the general rule were expenditures for food and beverages. Under prior law, such expenditures for food and beverages furnished on the business premises primarily for the taxpayer’s employees were 100% deductible. Under the “TCJA”, these expenditures are now 50% deductible. The limitation also applies to meals on business travel.
There are other exceptions, where a taxpayer can deduct 100% of the cost of food and beverage expenditures. These exceptions were in effect before and after tax reform, and examples include:
1. Recreational expenses, for the benefit of employees, such as a company picnic or holiday party; and,
2. Expenses for items made available to the public. For example, if a financial advisor hosts an educational dinner seminar and mail invitations to prospect clients.
No doubt, the disallowance of business meals and all forms of entertainment will create frustration among many business owners.
If you have specific questions, please do not hesitate to contact us.