Ballgames, Dinners and Tax Reform: The New Meals and Entertainment Deductions
June 25, 2018
Say goodbye to tax deductions for business entertainment expenses like baseball tickets and golf outings.
It used to be OK to lump together things like games and dinners as “meals and entertainment” expenses because all those things were generally 50% deductible.
But recent federal tax reform has changed that, though standalone business meals may remain partially deductible.
In light of tax reform, businesses need to review their meal and entertainment (M&E) spending right away.
Let’s help you avoid possible fines and accounting nightmares by looking at how to categorize your expenses now.
How to categorize meal and entertainment expenses
Here are a few ways to make sure your company’s M&E expenses are categorized properly:
- Decide on policy changes — evaluate your M&E policies and determine whether to make changes, then communicate them clearly to employees. Some companies are still allowing employees to entertain clients just as often as before, even if the expenses can’t be deducted. Others are trimming budgets, setting dollar limits, or requiring managerial approval.
- Educate employees — work with tax professionals or in-house finance staff to write a comprehensive guide for employees that explains the changes for each type of expense, and how to properly categorize them.
- Add more expense categories — adjust the software or programs that employees use to submit expenses and receipts to add additional specific categories that are easy to understand. Examples include “business meal with client” or “meal during client entertainment event.”
- Conduct spot checks — encourage accounting and finance team members and others who process employee expenses to conduct random checks every month to ensure that items are being properly categorized and that sufficient detail is maintained to justify expenses (i.e., Was there a business purpose and who were the attendees?).
Also, the new rules are prompting some companies to discover that they haven’t been taking full advantage of deductions for things like employee holiday parties and break room snacks.
Be sure to audit your own books and make necessary judgments if you find you were not taking the full deduction when and where permitted.
Which meal and entertainment expenses are NOT deductible?
Here are examples of M&E expenses that are no longer deductible:
- The cost of entertainment, like Atlanta Braves tickets, is no longer deductible.
- Meals that happen as part of those entertainment outings. (If you want to write-off half of a steak dinner with clients at Bones, do it on a night when you don’t also go to the ballgame.)
- Fishing and skiing trips, concerts and other recreational activities intended to entertain clients or develop new business.
Some professional and college teams are nervous about a drop in ticket sales, according to this U.S. News & World Report.
And some restaurant owners worry spending will drop, but they should remember that business meals on their own generally remain 50% deductible.
Also changed are certain business meals provided for the convenience of the company, such as those at a company cafeteria. They’re now generally 50% deductible, down from 100%. After 2025, they won’t be deductible at all, although some opportunity remains to deduct a portion of these expenses going forward. Consult your CPA-based advisory firm to see whether you are eligible. If you don’t have a CPA-based advisory firm then … hello.
Prior to 2018, expenses incurred by an employer for food and beverage that were excludible from employees’ income as “de minimis fringe benefits” (e.g., breakroom snacks, and infrequent business meals) were 100% deductible. Under the new law, de minimis employee food and beverage expenses are only 50% deductible.
Which meal and entertainment expenses ARE deductible?
Some things are still 100% deductible, such as:
- Recreational and social activities for employees, including holiday parties, summer picnics and mentoring events.
- Company events that are open to the general public where food and beverages are provided, such as grand opening celebrations.
Entertainment and events such as sports, concerts and recreational trips can’t be deducted any more.
Meals for employees at in-house cafeterias that were completely deductible are only half-deductible now.
Some employee social events can still be fully deducted, as can routine business meals.
Make sure your employees understand the new M&E rules and your company’s new policies. Nobody wants to raise the risk of audits or penalties over meals and entertainment.
|Office Holiday Parties||100 percent deductible||100 percent deductible|
|Entertaining Clients||50 percent deductible
Event tickets, 50 percent deductible for face value of ticket; anything above face value is non-deductible
|No deduction for entertainment expenses|
Employee Travel Meals
|50 percent deductible||50 percent deductible|
|Meals Provided for Convenience of Employer||100 percent deductible if excludible from employee gross income as de minimis fringe benefits; otherwise, 50 percent deductible||50 percent deductible (until 2025)|
Need help with understanding meals and entertainment expenses and tax credits for your business? Get in touch with Meredith to talk about how Aprio can help you.