Authored by William M. Apple
The Tax Cuts and Jobs Act of 2017 has made significant changes to the deductibility of business meals and entertainment starting in 2018.
At a high level, entertainment expenses are nondeductible and most meals are 50 percent deductible. Previously entertainment expenses were 50 percent deductible and a broader array of meals had the potential to be 100 percent deductible. We anticipate this area of tax reform will be heavily scrutinized by the IRS. It is important that your partners and employees properly enter and describe their activities.
A sample listing of the types of categories that you may wish to use is as follows:
- Entertainment – mileage
- Meals – celebratory
- Travel – airfare
- Travel – lodging
- Travel – mileage
- Travel – other
- Nondeductible dues
- Professional dues and meetings
Meals with client
In order for meals to be considered 50 percent deductible business must be discussed during the meal and should be classified as: meals. If no business is discussed the meal is not deductible for tax purposes and thus should be entered as: entertainment.
Meals with coworkers
Meals with employees/coworkers where business is discussed are considered 50 percent deductible and should be classified as: meals. If no business is discussed the meal is not deductible for tax purposes and thus should be entered as: entertainment.
Meals while traveling
Meals when traveling for business are considered 50 percent deductible and should be classified as: meals.
Company activities, such as holiday parties, birthday and anniversary celebrations, picnics, etc. are fully deductible. In order to capture the 100 percent deductibility, these expenses should be classified as: meals – celebratory.
No tax deduction is allowed for entertainment, amusement or recreation expenses. This includes tickets to not-for-profit high school or college sporting events, leased skyboxes for sporting events, transportation to/from sporting events, cover charge, taxes, tips and parking for entertainment events. These types of expenses should be classified as: entertainment.
Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation or any other social purpose. This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. These types of expenses should be classified as: nondeductible dues.
Exception: The following organizations are not treated as clubs organized for business, pleasure, recreation or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guest or to provide members or their guests with access to entertainment facilities and can classified as: professional dues and meetings.
- Boards of trade
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations such as bar associations
- Trade associations
Payments for sponsoring events, such as charity dinners or golf outings, will require separately stating the following amounts: fair market value (FMV) of entertainment, FMV of meal and the remainder being classified as: sponsorship.
You drive to meet a client, have dinner with them where substantial business is discussed, attend a sporting event and you drive home. Below is how the expense should be classified:
- Expenses for mileage to and from the time with the client: travel – mileage
- Dinner and/or drinks for the night: meals
- Sporting event tickets: entertainment
You drive to meet a client, attend a sporting event where substantial business is discussed and you drive home. Because the premise of the evening is to attend a sporting event below is how the expense should be classified:
- Expenses for mileage to and from the time with the client: entertainment – mileage
- Drinks for the night: meals
- Sporting event tickets: entertainment
You pay $5,000 to attend a YMCA golf outing with prospects where substantial business is discussed and the letter breaks out the fees as follows: hole sponsorship $3,500, green fees $1,000, lunch/drinks $500. Below is how the expense should be classified:
- Hole sponsorship: sponsorship
- Green fees: entertainment
- Lunch/drinks: meals
If the IRS issues further guidance on this topic that causes changes to the above procedures, Baker Tilly will provide further communications.
Please visit Baker Tilly’s tax reform resource center for additional information.
For more information on this topic, or to learn how Baker Tilly professional services specialists can help, contact our team.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.