New Tax Law Overhauls Tax Benefits of Meals and Entertainment Expenses by Jeffrey M. Mutnik, CPA/PFS
Posted on February 27, 2018 by Jeffrey Mutnik
The Tax Cuts and Jobs Act (TCJA) makes it more costly for businesses to wine and dine prospects and clients with meals and entertainment beginning on Jan. 1, 2018. While the new legislation keeps a 50 percent deduction for the cost of meals and beverages, it completely eliminates the deduction for client entertainment expenses regardless of whether or not they are directly related to business activities.
Under previous law, businesses could deduct 50 percent of “entertainment, amusement or recreation” expenses that were directly related to the active conduct of the taxpayer’s trade or business. With the passage of the TCJA, businesses can still deduct expenses for certain social events that benefit their employees. However, once these activities include clients, prospective clients or other non-employed persons, the deduction will disappear. This applies to tickets to sporting events, concerts and theatrical performances; golf and fishing outings; and membership dues to athletic, social and country clubs.
Despite the preservation of the 50 percent deduction for non-employee social activities, the new law puts a 50 percent deduction limit on the meals that businesses provide to their employees, either through an in-office cafeteria or catered meals. In 2026, this limited deduction is set to expire. Under prior law, as recently as 2017, these expenses were 100 percent deductible. In reality, all business meal expenses are now limited to 50% deductibility.
Taxpayers with an employer-operated dining facility should review expenses associated with the operation of such a facility, and determine if the limitation (and eventual denial) of a deduction for these expenses warrant a change in the taxpayer’s policy or practices with regard to the facility. All businesses should review their chart of accounts to separate meals from entertainment expenditures as of Jan. 1, 2018.
With these changes in the tax law, businesses will need to reconsider whether their generosity and business-building social activities will be worth the potential tax hit they will incur.
Because the law reduces the federal corporate tax rate from 35 percent to 21 percent, the impact of the lost deductions may not be so severe for those businesses organized as C corporations. Owners of businesses organized as pass-through entities, will also benefit from reduced federal tax rates, but the rate reduction may not be able to offset the loss of entertainment deduction.
All types of businesses, regardless of the structure, must assess the impact the changes to the meals and entertainment (M&E) deduction will have on their bottom lines. At the same time, they must also consider that new law eliminates a number of other employer deductions. For example, the TCJA removes an employer’s ability to deduct transportation expenses that subsidize workers’ commuting costs, and it limits the deductibility of employee achievement awards.
Businesses have a lot of decisions to make in 2018 that will affect their ultimate tax liabilities in the future. Making these assessments should be conducted under the guidance of experienced accountants and advisors who understand the nuances of the new tax law and how they will impact businesses and their owners.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director of Taxation and Financial Services with Berkowitz Pollack Brant Advisors and Accountants, where he provides tax- and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at firstname.lastname@example.org.