Blog update for the 2017 Tax Cuts and Jobs Act!!
For those of you who may have not yet heard, the 2017 Tax Cuts and Jobs Act put a major damper on tax deductions for entertainment expenditures. Basically for 2018 and going forward the tax deduction for entertainment deductions is stuck at a measly 0%. To put it simply, everywhere in the below blog where it mentions a deduction for entertainment, be it theaters, sports events, etc. -consider the deduction to now be 0% for the entertainment portion. The % deduction for meals under the new and old rules has not changed.
Deciphering Meals & Entertainment Tax Deductions
I have finally come out of the haze that is busy season and realized that I was overdue to write a blog post and I had the suggestion of meals and entertainment (M&E)!!! At this point I imagine I may be losing some readers as they are going back to their actual meal rather than reading about what most consider being one of the easier non-deductible tax items. But have no fear… the IRS has made the seemingly simple topic about as complex as you can imagine.
When I started to write this post it dawned on me not how simple the topic meals and entertainment should be, but rather, how many times it may be reflected incorrectly on tax returns. For example,
Do you just take the M&E account and multiply it by 50% or do you break out things such as picnics and Christmas parties?
What about if clients or friends attend the party?
All of the above have specific rules and limitations on them that may not be inquired upon. Normally when I look at a return, I see either all of M&E deducted at 50% or a portion at 100% that the preparer broke out separately.
First off, what qualifies as meals and entertainment? Basically it is any food, beverage or function that can be deemed “entertainment”. Think of it as almost anything other than sitting in your chair at work staring at a computer screen. If you consider it fun and something that the IRS deems you may want to do in your free time outside of work it likely will be considered entertainment.
So let’s start out with the holy grail of meals and entertainment – 100% deductible. In order for meals and entertainment to be in this category they must be one of the following:
A De Minimis Fringe Benefit:
These are items whose value, when you consider the frequency provided, would be unreasonable to track. Although this definition is at best vague, items that fall in this category are things like coffee & doughnuts (may be provided daily but value is minimal). It is not that common (or at least I hope not) for an employer to track each cup of coffee an employee takes. Things such as occasional parties, meals or picnics for employees and their guests would also be considered de minimis and 100% deductible. Depending on the circumstances, certain meals for employees may be able to fall under this exclusion. Just be aware that if something is limited or mostly for what the IRS considers “highly compensated employees” that it likely will not qualify under this category and may be considered nondeductible/taxable income.
Included in the Employee or Non-Employee’s Income:
This one is pretty self-explanatory. The IRS is nice enough to let you deduct something if someone else has to pick it into income.I am going to go out on a limb and say if you tell a customer that they will have to pay tax on the meal/entertainment you provided that they will not be a customer for long!
A Recreational or Social Expenditure:
This is pretty similar to the parties, meals or picnics under de minimis fringe benefits. In order to be 100% deductible, the event would have to be for only employees (and not just those considered highly compensated) and their guests. Having the top executives of the company invite a couple employees out for the annual golf outing isn’t exactly going to cut it.
At the Convenience of the Employer:
If there is a viable reason that an employer would need to provide meals to employees then they would be 100% deductible. Such reasons are things like employees needing to be available for emergencies during lunch (i.e. I am sorry fellow accountants, but I cannot see how someone always declaring there are “tax emergencies” could count… No matter how often someone says it is an emergency), the period that is allotted to the employee to eat is small or it would not be viable for them to go elsewhere.
Basically, if you have meals or entertainment for employees there is a good chance that the amount may be 100% deductible.
Next up is the not as popular 50% bucket. To even begin to be considered partially deductible, the expenditure must be for a valid business purpose.
If there is not a valid business purpose, such as meeting with a client or prospective client to discuss business, then the expenditure is considered personal and non-deductible.
You may be having the following thoughts running through your head:
“So you are telling me that if I have a meal with a prospective client and that meal lands me the work that I can only deduct 50% of the meal?! Even if the meal resulted me generating thousands of dollars of taxable income?!”
And you would be absolutely correct. This is a case where the government gets to have its cake, take half of your cake, and then eat all of the cake.In all honesty though, the 50% limitation is there to deter taxpayers from deducting personal meals.
Tax Cuts and Jobs Act Update – 2017
The major change here is that the entertainment portion of the cost is now 0% deductible. In order to deal with this is it probably a good idea to book meals to one account entertainment to another. Another side quirk is what if you go to a basketball game with a client and the cost of the ticket included food and drink. According to the IRS, if the value of the food and drink is broken out separately, you can deduct 50% of the food and drink and 0% of the cost of the sporting event. If however, the food and drink is not broken out, the entire amount is nondeductible. Many are likely thinking that they will just do an estimate of the food and drink. Unfortunately the IRS beat you to it and have determined that if the amount is not broken out, that the entire cost is nondeductible.
The last bucket of M&E expenditures are the the dreaded non-deductible meal and entertainment. As most of you probably know, club dues such as those for country clubs are considered non-deductible. This is the case even if you have a holiday or other function at the country club that qualifies as 100% deductible.
The other major item that many may forget is that even though holiday parties and the such are 100% deductible for employees and 50% deductible for business associates, the cost of the owner’s friends, are 100% non-deductible. Essentially, the IRS does not want to give a tax deduction for throwing a ragger for you college buddies because you invited your employees to deduct the cost of 15 kegs, an 11 foot long submarine sandwich and Vanilla Ice as your DJ to bring back those “good ole’ years”.
Lastly, in order for any meals, entertainment or travel to be deductible, they cannot be considered “lavish or extravagant under the circumstances”.
What actually falls under this exception is up to debate but I would imagine that deciding to rent a Ferrari as a rental car for no reason other than you want to may land you in this category. On the other hand, it is likely that deciding to eat at a fancy restaurant would not be a problem.
This post covers the most common meals and entertainment expenses. There are additional considerations for less common expenses such as the use of a business aircraft, subsidized eating facility (a cafeteria at the office with discounted or free meals) as well as luxury boxes.
Until next time!