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Big Change in the Business Meals & Entertainment Deduction

Big Change in the Business Meals & Entertainment Deduction

One of the biggest caveats for business owners in the new Tax Cuts and Jobs Act (TCJA) is the complete loss of the business entertainment deduction. No longer can you deduct 50% of qualified business entertainment like ending a productive day with a client at the ballpark. But what about business meals, or meals that include some element of entertainment? That area is less defined. Here’s what we think we know so far:

  • Entrepreneur points out areas that are no longer covered, like sky box tickets, charitable sports events, or entertaining clients at a night club or athletic club. But they also mention the cost of entertainment goods and services that are available to the public for free as promotional items or sold to customers, such as on a cruise ship or a dinner theater, are still fully deductible.
  • Bloomberg cautions that while business meals are still “on the table” for a 50% deduction, there are many more strings attached. Meals like a dry-aged steak at a high-end restaurant will likely no longer “cut it” because they’re extravagant and the experience could even be viewed as “entertainment, amusement or recreation.”
  • CPA Practice Advisor covers different scenarios this change could affect, like meeting a client for lunch at a café versus a golf club, entertaining or providing meals in a hospitality suite at a convention, or throwing your company’s annual summer picnic.
  • Deductions are also gone or reduced for on-premise employee meals and transportation fringe benefits (like covering parking expenses for employees). Forbes reports that employers may look to offset these lost deductions with bigger investments in employer-sponsored IRAs and 401(k) plans.

It’s unlikely those who worked on the new tax code realized they were creating an existential crisis for business owners who are now asking themselves, “What IS entertainment? Can eating be entertainment?”

Unfortunately, it may take some time before there is any guidance issued by the IRS, although it’s been requested. In a recent letter to the IRS, the American Institute of CPAs (AICPA) recommended an exception for business meals with a current or prospective client, that aren’t lavish or extravagant under the circumstances, and where the taxpayer has a reasonable expectation of deriving income or business benefit from the encounter. The AICPA also recommends guidance that states business meals separately charged but while at an entertainment event remain 50% deductible.

In the meantime, feel free to contact us with questions and be sure to document your expenses carefully. With the newly enacted tax code being so vague, we may all be surprised what can and can’t be deducted once more guidance is issued.

Image Copyright: georgerudy / 123RF Stock Photo
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