Sarah J. Fischer, CPA
When owners, managers and salespeople attend trade shows, call on customers or evaluate suppliers, they may incur meal, travel and entertainment expenses. Many of these expenses may be deductible if they’re properly substantiated, but some of the rules have changed under the Tax Cuts and Jobs Act (TCJA).
Entertainment Expenses No Longer Deductible
Business “entertainment” expenses used to often be lumped in with meal and travel expenses, and were 50% deductible. The rules for entertainment expenses have changed dramatically under the TCJA. Specifically, it disallows deductions for most business-related entertainment expenses, including the cost of facilities used to entertain customers.
Examples of nondeductible entertainment expenses under the TCJA include:
- Tickets to sporting events
- License fees for stadium or arena seating rights
- Private boxes at sporting events
- Theater tickets
- Golf club dues and greens fees
- Club memberships
- Entertainment related meals (e.g. meals incurred when no business conducted)
- Company golf outings for customers, and
- Hunting, fishing, and sailing outings
Some business-related entertainment expenses may still be deductible, but only in very limited circumstances. These circumstances include entertainment presented at an event open to the public and expenses associated with social activities for employees, such as office parties and team bonding activities.
The cost of food and beverages purchased at entertainment events, may be 50% deductible IF the following requirements are met: meals are stated separately from the cost of entertainment on bills/invoices, the taxpayer or their employee is present, and the meals are provided to a business associate/client, and there was some sort of business matters discussed.
The deductibility of entertainment expenses also varies depending on the taxpayer’s type of business. For instance, a fishing guide incurring expenses for fishing trips with clients remains deductible as an ordinary and necessary business expense. On the other hand, a flooring distributor would be disallowed a deduction for a fishing trip with clients as non-deductible entertainment.
Meal Deductibility Under TCJA
Meals as a business deduction generally remain 50% deductible under TCJA. There are however some changes worth noting:
- Client business meals were previously 50% deductible if the taxpayer was present and the meal was neither lavish nor extravagant. Under the new rules, the deductibility of these meals now requires business to be conducted/discussed in order to get a deduction. Otherwise the meal will be considered business entertainment and thus non-deductible.
- Meals provided for employer’s convenience and meals provided occasionally to employees were previously 100% deductible as a de minimis fringe benefit. These expenses are now 50% deductible and will be nondeductible after 2025 if legislation is not enacted to change this.
- Similarly, office water, coffee and snacks were previously 100% deductible as a de minimis fringe benefit, however, these expenses are now 50% deductible and nondeductible after 2025 under the rules in place as of this article’s publishing.
Keep Detailed Records
As a result of the above changes proper documentation will be increasingly important to prove/substantiate the business purpose of meals.
You must keep detailed records to substantiate any business expense. But it’s especially important for meals, entertainment and travel expenses. Why? These expenses are IRS hot buttons, so those records are likely to be scrutinized if you’re audited.
Proper substantiation includes these details about the expense:
- The amount
- The time and place
- The business purpose, and
- Listing of those in attendance and their relationship to the taxpayer (client, consultant, potential customer, etc.).
There must generally be documentary evidence to substantiate these business expenses.
Meals incurred while an employee is traveling for business are still 50% deductible. If you reimburse employees for meal and travel expenses, make sure they’re complying with all the rules. And, enforce a policy that requires timely expense report submission. It’s almost impossible to re-create expense logs at year end or to wait until the IRS sends a deficiency notice.
Finally, track meals and entertainment expenses separately. If you continue to lump these expenses into the same account, you will likely create a time and expense burden when tax time rolls around and your tax accountant has to break out meals from nondeductible entertainment.
Review Policies and Procedures
If you haven’t done so already, it’s important to assess your company’s expense allowance policies to determine if the TCJA provisions warrant changes — especially for meals and entertainment expenses.
Sarah J. Fischer, CPA, is an Associate Principal with Dalby Wendland’s Grand Junction tax office. She specializes in tax planning and preparation services for individuals and private companies in several industries, including auto dealerships, manufacturing, and medical practices, and serves as one of the Firm’s specialists in the Affordable Care Act. Sarah frequently writes guest articles on individual and business issues for The Business Times and Dalby Wendland’s blog. She is also a presenter for various industry organizations on tax issues and updates affecting their industry. She is a member of American Institute of CPAs and Colorado Society of CPAs.
