The recent enactment of the Tax Cuts and Jobs Act (TCJA) brought many changes to how individuals and businesses are affected by our tax system.
Among the deductions affected was the deduction for meals and entertainment incurred in the course of operating a business. Prior to the enactment of the TCJA, which took effect for many provisions on January 1, the allowable deduction for meals and entertainment expenses was capped at 50% of the allowable amount of such costs that were incurred. Under the old law, no deduction was allowable unless the cost was either directly related to or associated with the conduct of business.Beginning in 2018, the rules of the game have changed. Now, even entertainment expenses that are deemed to be business-related are no longer deductible. What is included in this prohibition? Specifically, no deduction may be taken for entertainment, amusement or recreation activities. A prime example of this would include tickets to sporting events. In addition, membership dues for clubs used for business, social or recreational purposes, as well as the costs incurred for such facilities are no longer deductible. Under prior law, dues paid to a club were deductible if the facility was used primarily for business purposes and the costs were directly related to the business activity. This is no longer the case.
Certain entertainment expenditures will still be fully deductible. The primary example of this is an expenditure for recreational or social purposes that is mainly for the benefit of employees, i.e., a company picnic or Christmas/Holiday party.
If there’s a silver lining to the above rules, it’s that businesses may still deduct 50% of meals (food and beverages) consumed in connection with operating one’s business. For example, meals that are consumed while traveling will be 50% deductible. In addition, the cost of meals furnished for the convenience of the employer on the premises (i.e., company cafeteria or lunchroom) will also be 50% deductible. After 2025, this expenditure is scheduled to be disallowed. It will still be a wise choice to keep good records of business meals. This would involve keeping a log of all receipts, indicating what the business purpose of the meal was, and who was present.
Understanding what qualifies as a business deduction can be confusing. Fortunately, we guide clients every day to help reduce taxes and increase cash flow. Contact us at info@zinnerco.com or 216.831.0733. We are happy to help and ready to start the conversation.
