Client dinners, corporate events and employee activities – these are all important business development and team-building tools, not to mention potentially deductible expenses for businesses. Deductions for business entertainment and meal expenses are among the many altered by the Tax Cuts and Jobs Act. As year-end planning approaches, employers may wonder how much of these expenses they can still deduct. Below, we highlight tax reform’s key changes to this area of business expense deductibility and revisit best practices for substantiation.
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Deduction for Entertainment Expenses Eliminated
Tax reform eliminates the deduction for entertainment expenses, which were previously 50 percent deductible. This deduction is no longer available for amounts paid or incurred after December 31, 2017. Entertainment expenses are amusement or recreation activities directly related to the conduct of a taxpayer’s trade or business – for example, the cost of tickets and associated expenses incurred while hosting current or prospective clients at country clubs, theaters and sporting events. It should be noted, however, that employer costs for strictly employee recreational activities, such as company holiday parties or annual gatherings, are still fully deductible.
Business Meals Deduction Remains
Food and beverage expenses associated with business activities are still 50 percent deductible. To continue to recognize the 50 percent deduction, the business meal must not be lavish or extravagant, should take place while business is conducted and happen in the presence of both the taxpayer (or employee of the taxpayer) and a customer or vendor.
Reduced Deduction for Employee Meals
Effective for amounts paid or incurred after December 31, 2017, certain meal costs provided for employees that were previously 100 percent deductible are now only 50 percent deductible. For tax years after 2025, the 50 percent deduction drops to zero or in other words, 100 percent nondeductible. These costs include de minimis meals, on-premises meals and meals provided for the convenience of the employer.
Best Practices for Meals and Entertainment Recordkeeping
Certain details about events and expenses must be maintained, in order to support the deductions taken. Documentation can be as simple as a copy of the receipt, with attendees and a short phrase regarding purpose of the meal jotted down on the back. Some employers already use a standardized expense reimbursement form, which can be updated to include prompts for pertinent information regarding attendee details and purpose or primary discussion topic of the meal.
Obtaining and retaining this information not only supports the basis for deductions taken on year-end returns but also helps in the initial recording of the expense to the proper general ledger accounts. A related best practice is to set up separate general ledger accounts for each class of meals and entertainment instead of merging into one account. This approach helps to keep the deduction and documentation process clearer and simpler.
Claiming and properly documenting all available deductions is just one of the ways RKL’s Small Business Services Group supports local entrepreneurs across a range of business matters. Contact us today to find out how we can drive real results for your company.