Note that an update has been made to the information posted in this blog based on new IRS guidance. Click here for more information.
For decades, small and large businesses alike have been able to deduct many of their business-related and meal expenses. That all may be changing thanks to the Tax Cuts and Jobs Act (TCJA).
Since 1986, businesses have been able to deduct 50% of business-related entertainment and meal expenses -- taking a client to lunch, for example -- and 100% of meals provided to employees on its premises. In addition, qualified transportation fringe benefits, such as work-related parking costs have been deductible to the employer. The TCJA eliminates deductions for entertainment, amusement, recreation expenses, and membership dues, and disallows deductions for qualified transportation fringe benefits. The idea is that businesses will see their tax rates reduced under TCJA, so the elimination of the deductions is fair. (Note that meal expenses associated with operating a business, such as meals during employee travel, remain at the 50% limitation.)
Here are just a few ways you might feel impacted by these changes:
- Taking a client to lunch or providing comped ballgame tickets would not be deductible. If you like to “woo” clients this way, you may want to change your strategy.
- Buying lunch for your employees to eat on premises, as during a working lunch, would only be partially deductible, subject to the 50% threshold. This used to be fully deductible, so it might be something you do less often.
- Providing parking passes to employees at garages near the office would also not be deductible. This was previously fully deductible, so that benefit may be something you need to cut.
The change to the treatment of these expenses raises questions over many other things. For example, would advertising that's integrated with an entertainment event be deductible? Would charitable sponsorships that take place during an entertainment event be deductible? Is taking a client out for drinks entertainment (and therefore not deductible) or a business expense (50% of the cost deductible)? There are a lot of questions that need to be answered, and IRS is expected to provide further guidance soon.
What do we recommend? First, document everything. Our best advice for business owners now is to maintain meticulous records of all expenses. That will make sorting out fully/partially/not-at-all deductible expenses easier once we get more guidance from IRS. In addition, it’s not a bad idea to start looking at employee perks that we know will provide more robust deductions -- employer-sponsored IRAs and 401(k) plans, for example. Those are generally well-received by employees, and they provide a nice tax break for you, too. Of course, we can help you decide on the best course of action.
So many things have changed with the Tax Cuts and Jobs Act, and much uncertainty remains. Given the fact that we’re half-way through the calendar year, we understand the frustration. Stay tuned to updates here on our blog, and be sure to attend one of our upcoming seminars on tax legislation changes (details will be posted soon on our Events and Facebook pages). Together, we’ll unravel the mysteries surrounding business and personal taxes and set you on the right course of action.