Client entertainment is a cornerstone of running a small business. The tax law known as the Tax Cuts and Jobs Act (TCJA) has given many small business owners anxiety regarding what is considered a deductible business expense beginning in 2018.
We are not accountants and always recommend that you seek the opinion of your tax professional. We can, however, suggest ways to make your accountant’s job easier by setting up accounts to categorize your meals and entertainment expenses.
The law was vague about meals but very clear that client entertainment expenses are no longer deductible starting January 1, 2018. The Internal Revenue Service (IRS) issued guidance this month on how to handle deductions for meals. We recommend you set up four accounts as follows:
1. Meals – 50% Deductible
- Employee travel meals: Meals incurred by an employee while traveling for work for a period longer than an ordinary day of work
- Meals for employees, stockholder business meetings: Meals directly related to business meetings of employees, stockholders, agents or directors
- Business meals: Meals with a current or potential business customer, client, consultant, or similar business contact
- Meals for meetings of business leagues: Meals directly related and necessary for attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade that are exempt from taxation
2. Meals and entertainment – 0% deductible
- All entertainment: Admission fees, tickets, and food and beverage unless the food and beverage is separately stated from the cost of the entertainment on one or more bills, invoices, or receipts
If you attend a baseball game with a client, the cost of the game tickets are an entertainment expense and not deductible. If you purchase hot dogs and drinks separately from the tickets, that is not an entertainment expense and therefore deductible at 50%.
3. Meals and entertainment – 100% deductible
- Expenses treated as compensation: Meals, entertainment, amusement, and recreational expenses treated as compensation and included as wages for income tax purposes
- Reimbursed expenses: Expenses paid or incurred by the taxpayer, in connection with services performed for another person or business, under a reimbursement or other expense allowance arrangement with the person or business, if the taxpayer accounts to such person or business by providing a breakdown of the expenses
- Recreational, etc., expenses for employees: Expenses for recreational, social, or similar activities for the benefit of employees (other than highly compensated employees). These expenses would include holiday parties or company picnics.
- Items available to public: Expenses for goods, services, and facilities you or your business make available to the general public
- Entertainment sold to customers: Expenses for entertainment goods, services, and facilities sold to customers
- Expenses includible in income of persons who are not employees: Expenses paid on behalf of nonemployees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award
- Fringe benefit food and beverage: Food and beverage, the value of which is so small as to make accounting for it unreasonable or administratively impracticable (snacks, coffee, water, etc.)
Meals for Employer Convenience – 50% deductible (This becomes 0% in 2025)
- Meals for employees who are required to staff their positions during meal times (hospital staff for example); meals served to employees at in-office cafeterias.
- Food and meal costs for employees required to live on premises for the convenience of the employer
The above classifications and deduction amounts are current as of October 2018. As indicated previously, make sure to consult your accountant for specific questions. For more tips, contact us today.