The New Tax Law took the "Fun" out of Tax Deductions

By: Corry Hunter, CPA

Nearly six months after the Tax Cuts and Jobs Act (TCJA) was first announced, most Americans are still digesting the full scope of the new law. One important change that may have flown under your radar is the elimination of the deduction for business entertainment expenses, as well as for meals related to business entertainment – such as the expense of a hot dog at a baseball game, or lunch at the golf course.

Prior to the TCJA, business meals and entertainment were both deductible – but limited to 50% of the total cost. (The 50% limitation was meant to recapture the benefit of the business owner’s portion, when they took a client out for a business meal, or entertainment.)

Now, the TCJA spells out, “No deduction otherwise allowable under this chapter shall be allowed for any item … with respect to an activity which is of a type generally considered to constitute entertainment." 

This means that giving away sporting event tickets to clients would not be deductible as a promotion, for example. 

In a related change, meals for the convenience of the employer – which were previously deductible at 100% – are now limited to 50% deductible.

This would apply to meals for crew members on a fishing boat, for example. Although an unavoidable cost for some employers, such expenses are not fully covered under the TCJA.

Business owners will, however, still be able to deduct the full 100% cost of office parties. 

This provision could prove to be sticky. 

If a company rented out a day spa for a company party, for example, would that constitute entertainment, making the total cost not deductible? Questions like these may lead to revisions in a future version of the TCJA. 

Overall, these changes do leave some room for taxpayer interpretation, meaning that they are likely to end up in tax court. 

Someone might ask, for example, if I go to a Mexican restaurant that has mariachis, is that entertainment or a meal? Or, if I go to a comedy show that has a dinner included in the price of the ticket, how would that be treated? The need for a reliable CPA to help you navigate these questions is greater than ever.

Indeed, it’s essential for you to have your CPA check your accounting records, confirming that you have separated meals and entertainment into two separate accounts. That will ensure that proper deductions are taken on your business tax return. 

For more information call Osborne Rincon CPAs at 760-777-9805.