Entertainment Deduction Changes Under Congressional Tax Reform

Digesting What Tax Reform Means for
Business Meal & Entertainment Deductions

For many businesses, entertaining important clients and prospects is just part of the normal cost of doing business. However, as previously reported, tax reform passed in the Tax Cuts and Jobs Act eliminated the deduction for client meals and entertainment, including expenditures for sporting events, golf outings, the theater, clubs, etc. Prior to tax reform, under Internal Revenue Code (IRC) Section 274(a), these M&E expenses were generally 50% deductible if the activity was preceded or followed by a bona fide business discussion.

The chart below summarizes just some of the changes under the new rules:

Description 2017 Rules 2018 Rules
Meals provided to employees for the convenience of the employer
100% deductible (if tax free to employee)
50% deductible
Company parties, picnics or other recreational or social activities for employees
100% deductible
100% deductible (if for benefit of non-highly compensated employees)
Entertaining clients (meals, golf, sports or theater tickets, etc.)
50% deductible (tickets - face value)
100% deductible for qualified charity events
No deduction for entertainment expenses
Employee business travel meals
50% deductible
50% deductible

M&E Deductions that Survived the Cut

So while client entertainment expenses are no longer deductible; there are some Meal & Entertainment deductions that survived the cut. For example, the following employer expenses are deductible:

  • Entertainment, amusement, and recreation activities that are part of an employee compensation package and are reported as wages for income tax withholding purposes are 100% deductible.
  • Qualified business meetings (for employees, stockholders, agents, and/or directors) are 50% deductible.
  • Company holiday parties or other recreational or social activities for employees, including the facility rental, are 100% deductible.
  • Business meetings and conventions operated by a chamber of commerce or other 501(a) trade organization or board are 50% deductible (food and beverages).

In addition, subject to certain conditions, if your business sells entertainment or other items to customers; the expenses incurred for conducting those activities, including goods, services, and facilities may also be deductible.

Per the above chart, employee meals that were 100% but are now 50% deductible. This includes meals for required business meetings; whether those meetings take place on your business premises, in a hotel, or at another qualified meeting facility outside of your office. Expenses for breakfast, lunch, or dinner served to employees who are required to staff their position are also deductible; as are meals served at a company-operated cafeteria. If you have staff that live on your business premises for your convenience; their food and meal costs are also deductible.

Finally, employee meals for out-of-town business travel remain 50% deductible.

Keep in mind, the IRS will disallow any portion of any expense deemed as overly lavish or extravagant, and also requires proper recordkeeping and substantiation for the business purpose of any expenditure in excess of $75.

At Claremont Management, we can help you navigate the complexities of Meal & Entertainment deductions under tax reform and IRC Section 274; so you remain in compliance while taking full advantage of all tax-saving opportunities available to your company. Call John or Maria at (847) 398-7010 to discuss your specific facts and circumstances.

 

Claremont Management Corp.

  • Address: 1845 East Rand Road, Suite L111, Arlington Heights, IL 60004

  • Phone: (847) 398-7010

  • Fax: (847) 398-1275

  • Email: savetax@claremontmgmt.com

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