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Entertainment Expense Changes Due to Tax Cuts and Jobs Act October 2018
As I'm sure you are aware, 2018 has been a year of several tax changes, both corporate and individual. These regulations, while codified earlier this year, are still changing to this day and being updated by additional revenue procedures and IRS guidance. One of the first items we wanted to notify you of is some changes for the 2018 tax year regarding expenses for business-related meals and entertainment. Under the TCJA (Tax Cuts and Job Act), entertainment expenses are no longer deductible effective as of January 1, 2018.
Entertainment is defined in Notice 2018-76 as any activity which is considered to constitute entertainment, amusement or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacations, and similar trips, including activities relating solely to the taxpayer of taxpayer's family.
Under prior tax law, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment that are not lavish or extravagant and at which the taxpayer or an employee is present. Meals provided to an employee for the convenience of the employer on the employer's business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.
Under TCJA and transitional guidance from Notice 2018-76 issued October 3, 2018 (in response to AICPA request for immediate guidance); amounts paid or incurred after December 31, 2017 for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% dis-allowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer's premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer's premises will be nondeductible.
The following accounts should be established in your bookkeeping systems to assist in tax return preparation at year end:
Entertainment - which will be non-deductible
Meals (100%) - meals provided as social occasions for employees
Meals (50%) - meals for client business meetings, employee reimbursements linked to travel away from home
Travel - Reimbursement for hotel and other travel expenses for employees.
Examples provided in Notice 2018-76:
(a) Taxpayer invites a business contact to a sporting event then subsequently purchases food. The food is 50% deductible as a business meal, but the entertainment is not deductible.
(b) Taxpayer invites business contact to a sporting event where they have access to food as part of the package. There is no deduction allowed, since the food is not separately stated on the invoice or bill.
(c) Same scenario as (b) except the bill shows the separate cost of tickets and food. The food can be deducted at 50%.
For some of you, the meals and entertainment expenses are not significant to your operations. However, for others it can be a large part of your expenditures. We would advise you to use the four tier accounting listed above to account for your travel, meals, and entertainment costs going forward. This will ease preparation of tax returns and financial statements (if required) at year end, as well as aid in planning. For the first part of the year, these costs will need to be revisited and allocated accordingly between the four categories.
Again, should you have any specific questions on the new regulations or accounting suggestions, please contact your Furrer & Associates, Inc. advisor at 440-899-7116. Thank you.
*This information is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this post should not be acted upon without specific professional guidance.
Steve | 10/23/2018
Furrer & Associates, Inc. | 28045 Clemens Road Suite B , Westlake, OH 44145 | Phone: (440)899-7116 | Fax: (440)899-7182 | email@example.com