The 2017 Tax Cuts and Jobs Act introduced some significant changes to the way businesses could handle deductions for business meals and entertainment expenses. Although the TCJA guidelines for these expenses haven’t undergone much revision, the IRS has provided further clarification for activities classified as expenditures related to entertainment, amusement, or recreational activities. The term entertainment does not include food or beverages unless the food or beverages are provided at or during an entertainment activity and the costs are not separately stated from the entertainment costs.
The following expenses are not deductible:
- Sporting event tickets
- Transportation to/from a restaurant for client business meals
- Club memberships and club-related expenses
- Meals during entertainment that are not listed separately on the invoice
The following types of expenses are 50% deductible (these were 100% deductable pre-2018):
- Meals provided for the convenience of the employer (such as meals for occasional employee overtime)
- Water, coffee, and snacks at the office
- Meals included in charitable sports packages
The following deductions were unchanged by the TCJA and continue to be allowable:
- Meals in office during meetings of employees, stockholders, agents, or directors (50% deductible)
- Meals during business travel (50% deductible)
- Meals at a seminar or conference (50% deductible)
- Meals included as taxable compensation to an employee or independent contractor (100% deductible)
- Meals sold to a client or customer (100% deductible)
- Food offered to the public for free (100% deductible)
- Office holiday party or picnic (100% deductible)
- Client business meals (50% deductible if the taxpayer is present and not lavish or extravagant)
If you’ve been coding your meals and entertainment expenses in your bookkeeping software the old way, your accountant will need to manually review each expense to determine what’s allowable. Coding these expenses correctly will keep your books clean for tax time.
We have two bookkeeping recommendations for expenses:
- Separate expenses that are strictly for entertainment purposes—if you don’t already have one, create a new account for these, and designate which are business meals. Travel expenses should be completely separate from entertainment, including meals while traveling. Travel expenses are 100% deductible, except for meals while traveling, which are 50% deductible.
- Create a separate category for employee social meals. These would include things like your holiday party, summer picnic, team building events, staff mentoring, etc. All of these are 100% deductible expenses.
If you’re unsure how your 2020 meals and entertainment expenses will impact your tax return, schedule a meeting with your tax advisor. Here are some of the other common tax points we recommend business owners consider as the year draws to a close. Did your business…
- Receive a PPP loan?
- Dispose of depreciable property this year?
- Have a debt canceled?
- Defer employees’ payroll taxes in the fourth quarter?
We offer a year-end tax projection to help you understand how 2020 has impacted your business taxes and plan for next year. Contact us to schedule a tax projection today.