Prior to enactment of the Tax Cuts & Jobs Act (TCJA), businesses were allowed a deduction for 50% of their expenses related to the ordinary and necessary expenses considered to be entertainment, amusement, or recreational in nature if the business could establish that the expense was directly related to or associated with the active conduct of the trade or business and that it was not personal in nature. Without the following items to substantiate the entertainment expenses, the IRS could disallow any deduction for the expenses:
- The amount of the expense
- The time and place of the expense
- The business purpose of the expense
- The business relationship to the business of the individuals being entertained.
A deduction for 50% of meals expenses incurred while entertaining a customer, vendor, or other business partner was also allowed if the same substantiation rules were met. Meals for employees while away on business travel were also 50% deductible.
Meals provided to employees for the convenience of the employer were 100% deductible as were travel expenses, such as airfare and hotel expenses.
The TCJA has changed the tax law to disallow any deduction for entertainment expenses. Any meal expense related to such entertainment activities is still 50% deductible.
Additionally, the TCJA has changed the way meals provided for employees are deducted. The TCJA changed this so that all meals (while away overnight for business, entertainment related and those provided to employees for the convenience of the employer) are 50% deductible for amounts incurred after December 31, 2017 and before December 31, 2025. Meals provided at the convenience of the employer will no longer be deductible beginning January 1, 2026.
A deduction for 100% of business travel costs continues to be deductible, subject to the same substantiation rules.
Planning and Record Keeping
If your business incurs these types of expenses, we recommend evaluating the way you capture these costs in your financial records. If you currently record all meals and entertainment expenses in the same general ledger account, we recommend creating separate accounts - one for entertainment expenses and one for meals expenses, because they are now 0% and 50% deductible, respectively. This will assist you at the end of the year to know which expenses are deductible at 50% and which expenses are not deductible.
If your company has a fiscal year end, keep in mind that these rules changed mid-year for you and we recommend that you implement the new record keeping system for all transactions occurring after December 31, 2017.
Additionally, the substantiation rules have not changed for travel and meals. Always keep receipts and records that list the 4 documentation requirements listed above to avoid the risk of having your expenses disallowed by the Internal Revenue Service.
If you need assistance in implementing this change, please contact us.