No More Business Meals Deduction in 2018???
One of the sections of the new tax law is the elimination of the Entertainment deduction. Anyone familiar with business taxes knows that for years the company could deduct 50% of the category called "Meals & Entertainment".
So are MEALS considered ENTERTAINMENT?
First, it is a given fact that entertainment, meaning such events as taking clients to the golf course, tickets for ballgames or theater, going to a bar for drinks, joining the gym, etc., will be disallowed as of January 1, 2018, and after. That does not mean you cannot still do this as a marketing tool to gain or keep a client, but rather you cannot use it for a tax deduction, thus your income tax will increase.
But are MEALS entertainment if you are eating with a (potential) client and discussing nothing but business 90% of the time? Are meals "entertainment" if your employees are out of town on business and need to eat? Is it "entertainment" if you bring food into the office as a convenience to the company so employees can keep working and not lose time going out for lunch?
The answer to these are one of the gray areas of the new law.
Based on the strict reading of the definition of "entertainment" if would seem to be that meals are a DISALLOWED DEDUCTION, ...but we need to wait on IRS GUIDANCE as to the IRS interpretation.
The only one that would appear to be allowed, though not definitive, is employees travelling on company business who will not be back to the office by the end of the day. The food that s/he consumes on overnight business trips would seem to be a legitimate business expense because it would seem NOT to be entertainment. The others are questionable by definition.
Will the IRS decide that "entertainment" and "meals" are too different to put under the same umbrella? I would hope so, and some authorities believe that meals are not "entertainment" and are 50% deductible, but we will only know for sure after further discussion to resolve the issue. It will also depend if the meal has a "business purpose", which, in my experience, most business meals have a business purpose, thus I lean towards allowing the 50% deduction unless the IRS overrules it.
So what do you do in the meantime?
I would further segregate the expenses into at least three (3) separate categories. The subcategories would be:
1. ENTERTAINMENT. Those expenses used to give enjoyment to clients or potential clients, such as game tickets, golf outings, and open bar get-togethers. These types of events or expenses will NOT be deductible, so separate them.
2. Business meals where you take clients to lunch and discuss business for at least a large majority of the time. Make sure you record who was there and what was discussed to satisfy an IRS audit. NOTE: For the record, you could never claim, now or in the past, meals just for yourself nor with a family member(s) not involved in the business.
3. Meals at the office for employees at the convenience of the company so the employees can continue working and not lose time going out for lunch. This would seem to be deductible since it is not "entertainment", but only 50% will be deductible under the new law.
The point of each of the above categories is to allow you to more easily distinguish which may be deductible based upon the IRS ruling. Trying to decide which transactions were Business Meals vs. Office Meals vs. Entertainment at year end may be a time consuming task depending on the number of your Entertainment & Meals transactions.
More on this as the dictates become available!
Zollars, Edward K. May-June 2018. CPA Voice. Ohio Society of CPAs. Pgs 8-14.