Tax legislation is always a balancing between tax rates and deductions. The Tax Cuts and Jobs Act (TJCA) is a perfect example of rate reduction and deduction elimination. These significant legislative changes coupled with the legislation passing so quickly and the lack of specific guidance especially in the area of Meals and Entertainment Deductions begs the question; How to implement the new law changes given the lack of specific guidance?
Under the TJCA entertainment expenses as of January 1, 2018 are nondeductible. Prior to TJCA entertainment expenses were 50% deductible if they were directly related to a business discussion that occurred during or even before or after the entertainment event. These deductions were further defined by additional regulations and court cases.
Historically these regulations were interpreted fairly broadly and taxpayers have taken advantage of this liberal approach regarding these deductions by the Internal Revenue Service.
So, based on TJCA if entertainment expenses are nondeductible what about business meals with current/potential clients and customers, business meals with employees or meals due to out of town travel?
The Internal Revenue Service has historically held the position that a meal expense is a form of entertainment and historically when you or an employee of your company is present at the meal was deductible (subject to a 50% limitation)
Therefore, meals are a form of entertainment and are a nondeductible expense except as follows:
- Meals expense for recreational, social or other similar activities primarily for the benefit of the employees (does not include highly compensated employees) – 100% deductible.
- Meals expense incurred by a taxpayer which are directly related to business meetings of his employees, agents or directors – 50% deductible.
- Meals expense directly related to and necessary to attendance of a business meeting or convention of any organization described in 501(c)(6), business league, chamber of commerce and boards of trade – 50% deductible.
- Meals expense associated with out of town travel for you and your employee only – 50% deductible.
The approach for the tax year 2018 is to record and track the business entertainment expenses (including meals) by category and treat the expenses for tax planning and tax estimates as nondeductible as appropriate. When further clarification and guidance is issued by the Internal Revenue Service adjustments can be made if applicable. This conservative approach to a fluid situation is the best course of action given the lack of specific regulatory guidelines and should reduce the chance of a negative outcome at the tax payment deadline