The Tax Cuts & Jobs Act (TCJA) of 2017 made many significant changes for business tax deductions including the disallowing of the business deductions for most entertainment expenses. After a period of comments and proposed regulations, the IRS has released long-awaited final regulations for the treatment of meals and entertainment deductions, and businesses should apprise themselves of these changes.
The main change with the TCJA was the removal of certain entertainment expenses as tax deductible for a business. Prior to the TCJA, entertainment expenses were eligible for an up to 50% deduction in expenses directly related to the active conduct of a trade or business or for expenses incurred before or after a bona fide business discussion. The TCJA eliminated this deduction for activities considered to be entertainment, amusement, or recreation as well as removed the reference to entertainment as part of the 50% limitation of deductibility for food or beverages.
The final rules clarify that taxpayers may continue to deduct 50% of business meals if the taxpayer or an employee of the taxpayer is present, as long as the meal is not considered extravagant. Meals for current or potential business customers, clients, consultants, or similar business contacts are eligible. Food and beverages provided during entertainment events must be purchased separately from the event to qualify, otherwise they are considered part of the entertainment.
Note that the TCJA did not repeal the exception for certain recreational activities that benefit employees, reimbursed expenses, entertainment treated as employee compensation, or includable gross income of a nonemployee as compensation or as a prize or award, which must be properly reported by the taxpayer.
Separating meals and entertainment and aligning them in the right buckets for deduction can be tricky. Contact us for assistance in determining what qualifies.