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Understanding New Rules Regarding Business Entertainment Deductions

By MarksNelson on May 4, 2018 in Articles, Beth Van Leeuwen CPA, Tax
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If you own a business or work in a business, chance are that at some point, you’ve engaged in business-related entertainment of some sort. If so, you’ve probably reported those entertainment expenses as deductible on your taxes.

While the recently passed Tax Cuts and Jobs Act of 2017 (the Act) has far-reaching impacts in many areas of tax law, one of those areas is business-related entertainment expenses. The reality is, the rules around entertainment expenses have changed—and if you or your business engages in business entertaining of any kind, it’s important you take note.

What’s changed?

In general, the Act provides for stricter limits on the deductibility of business meals and entertainment expenses. Under the Act, entertainment expenses incurred or paid after Dec. 31, 2017, are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.” As an example, office holiday parties are still deductible. Business meals provided for the convenience of the employer are now only 50 percent deductible, whereas before the Act, they were fully deductible. Barring further action by Congress, those meals will be nondeductible after 2025.

Businesses should keep the new rules in mind as they plan their 2018 meals and entertainment budgets. See below for a chart comparing the rules before and after the Act.

What steps should your company take?

Review and revise your business entertainment policy as needed. Company officials should review changes to the deduction disallowance with a qualified tax professional and amend this policy accordingly.

Establish specific general ledger accounts. In order to easily identify how to treat various expenses during tax return preparation time, separate accounts should be established for three primary purposes:

  • To identify entertainment expenses that do not qualify for the business deduction
  • To identify those that fall under the 50 percent deduction limit
  • To identify those that are subject to a 100 percent deduction

Do you have questions about business entertainment expenses? Please contact your MarksNelson tax professional at 816-743-7700.