Tax Reform Less Entertaining

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Tax Reform eliminates the entertainment deduction for tax years 2018 and forward. Deductions for entertainment expenses will be disallowed and the current 50% limit on the deductibility of business meals is expanded to include meals provided on the business premises of the employer for those employers who have cooking facilities (previously 100% deductible). Business meals, and meals while traveling, are still deductible subject to the 50% limitation. It is uncertain if California will conform or when, but we expect they probably will as a revenue raiser.

“Business Meals” include restaurant and other meals, incurred for a client, prospect or other business meeting that are not extravagant under the circumstances, where the taxpayer has a reasonable expectation of deriving a business benefit from the encounter. (Meals while traveling and meals on premises are also considered “business meals.”) (Deductible at 50%)

“Entertainment” expenses are defined below, and exclude food and meals. (Not Deductible)

Entertainment is defined under Reg. 1.274-2 as “any activity which is of a type generally considered to constitute entertainment, amusement or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, on yachts, and on hunting, fishing, vacation and similar trips.” The regulation further goes on to state that “if an activity is generally considered to be entertainment, it will constitute entertainment for purposes of Sec. 274(a) regardless of whether the expenditure can also be described otherwise.” Please note that although the entertainment portion of the expense is no longer deductible, any portion that could be classified as a business meal will still be deductible subject to the 50% limitation.

In an effort for easier and better tax reporting, WNDE suggests, on a go forward basis starting in January of 2018, that you segregate the reporting of meals and entertainment into two separate accounts in your accounting records, using “Deductible Business Meals” and “Non-deductible Entertainment.”

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Partner Profile: Erin Johnson

Erin Johnson is a tax and advisory services partner. In this role, she manages client engagements, helps develop the staff...