Forget deducting season opera tickets or passes to sporting events. Ditto for business outings to the local golf course or the nearest hunting lodge.
While taxpayers may see a net benefit under the new tax law that reduces tax rates to 21 percent for corporations and 37 percent for individuals at the top marginal rate, other provisions may be less welcome. After the most sweeping tax overhaul in more than 30 years, entertainment expenses related to business are now non-deductible.
Just how will that new reality impact—and potentially change—the behavior of businesses like yours? Let’s break it down.
The Minutiae on Meals
First, here’s a primer. Where the old tax code allowed 50 percent of entertainment expenses to be deducted, the new law no longer allows for any deductions related to entertainment. The one exception remains recreational activities for the benefit of employees, such as holiday parties, which are still deductible at 100 percent.
In practical terms, let’s say a business spends $200 for golf at the local country club. It previously could take a deduction of $100 and, in turn, see an approximate $50 tax benefit—leaving the business with a total cost of $150. That is no longer the result. Now businesses must foot the entire entertainment bill.
There are still areas that qualify for deductions, however. The new law retains the 50-percent deduction for meals associated with entertainment events, so long as business was conducted at the event, and qualified de minimis meals, such as meal money to facilitate overtime work for employees.
At the same time, several deductions in the new tax law are set to sunset in 2025: These include meals provided for the convenience of the employer—previously 100 percent deductible, now only deductible at 50 percent—as well as meals principally for employees provided on the taxpayer’s business site and in an employer-operated eating facility.
Always an IRS Focus
The bottom line is you’ll want to get up to speed on the new expense rules. The IRS has always been keen on examining the entertainment and meal expenses that companies, particularly closely held businesses, write off. This focus makes solid accounting systems on your end as important as ever.
Simply put, with the complete elimination of entertainment expenses as a deduction, businesses may wish not only to reconsider how they do business, but they need to revise their systems of accounting to ensure expenses are properly delineated. So, for example, while entertainment used to include meals, now this category will need to be carved out separately from entertainment.
To ensure proper accounting, businesses should initiate an internal messaging strategy that conveys to salespeople how to approach new expense reporting requirements. Above all,
the report should include a box that allows capture of more in-depth information. A simple notation might read, “This was a meal, and business was discussed, including the new product launch” and identify who the meal was with.
Rethinking Business Engagements
Accounting systems, of course, are easy enough to implement. The new entertainment and meal deduction provisions may have more far-reaching implications. Business owners, chief financial officers, comptrollers, and anyone within a business used to tapping these deductions may need to rethink how business is conducted altogether.
Yes, the new law disallows the deductibility of entertainment expenses. There’s no getting around that. At the same time, your business can brainstorm new ways of engagement with prospects and clients. For instance, perhaps instead of buying $1,000 seats to a baseball game, a business can opt for $400 seats and divide the remaining money at a restaurant, with the latter deductible at 50 percent.
In other words, spend a little less money on the tickets and a little more on the dinner. Businesses, on the flip side, may reorder their price structures, charging less for the seats but more for the hot dogs (crazier things have happened).
Start Revising Expense Reports—Now
Regardless of approach, it’s important to remember that, if the past is any indication, the IRS will continue to look closely at expenses that might be personal in nature. The key question, particularly among closely held businesses, is “How do we set up our records to adequately capture these different expenses?”
Now is the time to review systems, get the company’s salesforce engaged in outreach with prospects and clients, and assure expenses are being documented appropriately in what now must be three separate silos: travel, entertainment, and meals.
When questions arise, make sure to speak to a tax professional. With the most sweeping tax overhaul in a generation now a reality, opportunities exist to take advantage of the ensuing tax cuts and, conversely, to understand some of the law’s pay-fors and plan them accordingly.
With proper planning, businesses may well be left with a tax benefit that offsets more immediate drawbacks, and perhaps positions them to consider $1,000 non-deductible stadium tickets no big deal after all.