Deduction for Business Entertainment Repealed

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Under the Tax Cuts and Jobs Act, the rules for writing off the dining and entertaining of customers, clients, and vendors have changed. Prior to the new law, 50 percent of most business meals and entertainment expenses could be deducted. Certain specific types of meals were allowed at 100 percent: meals provided through in-house cafés, meals provided at the convenience of the employer, and de minimis fringe meals.

 

The new law completely eliminates the deduction for entertainment and limits the deductibility of some employee-related meals previously allowed at 100 percent. Businesses should now account for business-related entertainment events separately from business-related meals, which continue to be eligible for the 50 percent deduction.

 

Entertainment

Expenses for entertainment were previously deductible at 50 percent if they were directly related to, or associated with, the active conduct of the business and the item directly preceded or followed a business discussion. Starting in 2018, these entertainment expenses are completely nondeductible.

 

Under IRS rules, entertainment includes any type of activity generally considered to constitute entertainment, amusement, or recreation. Undertakings no longer deductible include entertaining at golf and athletic clubs and sporting events, nightclubs, cocktail lounges, theaters, country clubs, and on hunting, fishing, vacation, and similar trips. Tickets to sporting events are no longer deductible. Events that take place at clubs are not allowed.

 

Meals provided during business entertainment are still deductible (at 50 percent) if they are not lavish or extravagant and the portion of the total amount that is attributable to meals can be substantiated. Recreational expenses for employees, such as holiday parties or summer picnics, remain fully deductible as long as the event is primarily for the benefit of the employees.

 

Under the old law, the cost for a charitable sporting event was fully deductible if certain conditions were met. The new law repeals this exception - charity events, like other entertainment, can't be deducted from business income. Any amounts paid in excess of the value of goods and services received may be deductible as a charitable contribution, not a business expense.

 

Meals

Business meals that are ordinary, necessary, and directly related to the active conduct of the business are still deductible at 50 percent. The rules continue to require that the meals are not lavish or extravagant and that the taxpayer or an employee is present at the meal.

 

However, certain de minimis employee meal expenses provided for the convenience of the employer, which were fully deductible under prior law, are now subject to the 50 percent limitation. These include meals provided through an on-premises cafeteria, meals provided at work for the employer's convenience, and beverages and snacks available on premises to all employees.

 

Please call your LM Cohen professional for more guidance on how the changes to meal and entertainment expenses affect your business.

 

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