As part of the 2018 tax reform, significant changes were made to the ability of businesses to deduct meals and entertainment expenses. The changes took effect January 1, 2018, and, as such, there are steps you should consider taking now to ensure compliance with the new provisions.
Previously, expenses for meals and entertainment were generally 50% deductible provided the taxpayer was able to demonstrate the expenses were ordinary, necessary, and directly related to their trade or business. There were certain circumstances under which 100% was deductible, including employer-operated eating facilities.
New Law – Entertainment
The Tax Cuts and Jobs Act completely eliminates an employer’s ability to deduct business entertainment expenses. This includes, but is not limited to, golf outings, sporting events, theater tickets, and sailing. Taxpayers may still be able to deduct 50% of meal expenses incurred at these events provided you are able to prove there was a substantial and bona fide business discussion associated with the activity.
New Law – Employer-Operated Eating Facilities
The Tax Cuts and Jobs Act has changed the deductible percentage of an eligible employer-operated eating facility from 100% to 50% for amounts paid or incurred beginning January 1, 2018 through December 31, 2025. For expenses paid after December 31, 2025, no deduction will be allowed.
Actions to Consider
In light of the above changes, there are many items taxpayers should consider. Some of the more notable items include:
- Establishing new general ledger accounts to track entertainment expenses disallowed under the new law to ensure these charges are separate from meals charges for which a 50% deduction is allowed
- Review substantiation requirements with respect to meals and entertainment expenses to ensure sufficient detail is provided on all charges
- Assess current policies with respect to employee business entertainment to see if any changes are warranted
The above summary provides highlights with respect to one area of the Tax Cuts and Jobs Act. If you would like to discuss how these provisions, or any other provisions related to tax reform, impact you, do not hesitate to contact us.