Limits on Entertainment Deductions Under New Tax Law

Limits on Entertainment Deductions Under New Tax Law

New Tax Reform Bill and Business-Related Deductions

The GOP’s tax-reform bill that President Trump signed on December 22nd of last year eliminated the business-related deduction for entertainment, amusement or recreation expenses, effective beginning in 2018. If you are a business owner who is accustomed to treating clients to sporting events, golf getaways, concerts and the like, this is bad news for you.

Although it doesn’t mean that you have to stop entertaining your clients – it means you can no longer deduct 50% of the cost of that entertainment as a business expense which makes it more costly for you to entertain clients.

However, the Act does retain a deduction for business meals that are directly related to or associated with the active conduct of your business.  The term “directly related” means that actual business discussions were conducted during the meal and you anticipated a specific business benefit from the meal.  The term “associated with” is more liberal and includes meals either preceding or following a bona fide business discussion.  In either case, the business deduction continues to be 50% of the actual expense.  Also remember that business meals must be documented, including the amount, business purpose, date, time, place and names of the guests as well as their business relationship with you.

And yet another change … In the past, employers have been accustomed to deducting 100% of the cost of food and beverages provided to employees at or near the place of business.  That too has changed, and the Act now subjects food and beverages supplied to employees to the 50% limitation.  But that deduction is only allowed through 2025.  As of 2026, employers’ costs for food and beverages furnished to employees will not be deductible.

Meals while traveling out of town on business continue to be deductible and are also subject to the 50% limitation.

If you have questions related to entertainment and meal expenses, please give this office a call.

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