Don’t Find Yourself Out to Lunch with the New Tax Law
Getting your deductions for meals and entertainment right for 2018.
By Kimberlee Gould*
The Tax Cuts and Jobs Act of 2017 brings changes that can help small businesses like yours, but not when it comes to deducting costs for meals and entertainment. In general, the new tax laws place stricter limits on whether—and how much of—these expenses can be deducted.
Before making any changes to your practice, please consult your tax accountant or financial professional regarding the specifics of your practice. If in doubt with any of the new changes, consult with your accountant. General guidelines are provided here.
There are a lot of changes and it can be pretty confusing for your bookkeeper. So here are the top three things you need to know:
1. No more free lunch
The new tax laws take a real bite out of the deductions you can take for business-related meals. Those sandwiches you bring in for lunch for your employees? That cost used to be 100 percent deductible but is now only 50 percent deductible. And the nachos and wings with a client before or after heading to the ballpark to watch your local minor league baseball team? While that cost would have been 50 percent deductible in the past, it may no longer be deductible at all. Here is some further clarification.
Under the old tax regulations, you could typically deduct 50 percent of the cost of business-related meals, such as a working lunch, or dinner when you’re travelling for business. Under the new tax law, business-related meals associated with running your practice (as opposed to entertainment-related meals) are still 50 percent deductible as long as they meet the requirements set forth by the IRS.
However, prior to 2018, meals you provided on site to your employees for your convenience could typically be deducted at 100 percent of the cost. Now those meals are 50 percent deductible rather than 100 percent deductible.
For example: You bring in lunch for your employees. Prior to 2017 the cost would have been 100 percent deductible; it is now 50 percent deductible.
For Clients and Business Associates
There is some ambiguity in the new regulations when it comes to the deductibility of meals with clients or business associates, especially when those meals are related to entertainment. Further guidance and clarification are expected from the IRS (follow up with your tax professionals).
For example: You purchase tickets to take businesses associates to a sporting event and take them to dinner beforehand. In the past, the cost of the meal would have been 50 percent deductible. That cost may not be deductible under the new regulations.
2. Not So Entertaining
Even before the tax law changes, you couldn’t completely deduct those tickets to the Aerosmith concert or that round of golf just because you took a business associate along, but you could usually deduct 50 percent of the cost. Under the new regulations, you can’t deduct any of that cost, no matter how much your client likes Aerosmith. Here’s some more information.
Entertainment expenses incurred primarily for the benefit of your employees (as opposed to business associates or clients) will continue to be deductible.
For example: You throw a summer picnic for your employees. The cost should be 100 percent deductible.
For Clients and Business Associates
Prior to January 1, 2018, you were generally able to deduct 50 percent of business-related entertainment expenses. The new law eliminates deduction of those expenses. So tickets to a sporting event or concert that you purchase to attend with clients, previously deductible at 50 percent, are no longer deductible.
For example: You throw a summer picnic for your clients and employees. The cost for the employee portion is most likely 100 percent deductible, but the cost for the client portion can’t be deducted.
Or for another example: You sponsor a team for a charity golf tournament that includes lunch. In the past, you could have deducted 50 percent of the cost of the meal and the golf. Under the new tax law, these expenses are no longer deductible.
Again, further guidance is expected from the IRS regarding the deductibility of meals associated with entertainment.
Sponsorships of Charitable Events
The rules for the deductibility of meals and entertainment associated with charitable sponsorships are complex. You should check with your tax professional.
3. Keeping it All Straight
The new regulations create a lot to keep track of. You will likely need to set up several general ledger accounts to keep everything straight. These general ledger accounts may include:
- Meals: 50 percent deductible
- Meals: 0 percent deductible (subject to further IRS guidance)
- Onsite meals for benefit of employer: 50 percent deductible
- Entertainment: 0 percent deductible
- Entertainment for the benefit of employees: 100 percent deductible
It might seem like it doesn’t make sense to establish general ledger accounts for expenses that are not deductible. But remember that the IRS is expected to offer further guidance that may result in those expenses being partially deductible. It will be easier to separate them up front than to go back through your expenses and recategorize them.
You’ll want to structure your accounts based on the specific needs of your practice, but these suggestions may help.
With all of these changes, it’s more important than ever that whoever handles the day-to-day accounting for your practice is categorizing and recording expenses for meals and entertainment correctly. For each business meal, it is important to record who was present, where it occurred, and what was discussed. For entertainment expenses, the IRS requires that you have records to prove the business purpose and the amount of each expense, the date and place of the entertainment, and the business relationship of the people entertained.1 And keep in mind that you may need to go back and reclassify expenses that were incurred early in the year.
Taking the time to record these expenses properly now will help to ensure that you’re not out to lunch when it comes time for tax preparation.
1 IRS Topic 512: Business Entertainment Expenses. https://www.irs.gov/taxtopics/tc512
Kimberlee Gould is the founder and president of MEDbook Solutions in Oxford, Michigan. She can be reached at firstname.lastname@example.org.
* The author has a vested interest in this subject.