The much-publicized Tax Cuts and Jobs Act (TCJA) realigned commonly-held tax notions. Meal and entertainment expenses that were once deductible are no longer allowed as deductible under the new rules. Tax code overhauls require a refresher for businesses to meet compliance with new TCJA regulations.
Prior to 2018, meal and entertainment expenses were simply subject to the “ordinary and necessary tests” for business expense deductions. In a nutshell, these tests determined if a reported meal or entertainment expense is part of the ordinary course of your industry and necessary for the course of your business. TCJA did away with much of what can be deducted for businesses. For example:
In 2017, Chon Wayne Services, an Alhambra marketing agency, treated clients annually to lower-stands seats at Dodger Stadium. They were able to deduct the costs as an entertainment expense at up to 50% of the value of each ticket. Under the new rules of TCJA in 2018, these entertainment expenses are no longer deductible.
Some Exceptions to Meal & Entertainment Deductions
Meals, under certain categories, still remain 50% deductible:
- Employee meals while traveling.
- Meals for employees or stockholders during business meetings.
- Meals provided for business league meetings
- Meals for the convenience of employer. Examples such as meals served to employees on the premises or an in-office cafeteria. However, this will become 0% deductible in 2025.
Good news is that there are still specific exceptions to the limits in claimable entertainment deductions. These still remain 100% deductible:
- Expenses treated as employee compensation.
- Reimbursed Expenses.
- Employee recreational expense, other than highly compensated employees (such as a company picnic).
- Business meetings and conventions.
- Meetings of certain tax-exempt organizations like business leagues.
- Entertainment available to the public (E.g. complimentary hotel rooms provided by casinos).
- Entertainment sold to customers (E.g. operating a pleasure cruise ship as a business).
- Expenses treated as non-employee compensation or a prize.
In order to properly claim these deductions, the IRS requires businesses substantiate these expenses. Therefore, to claim these deductions under the new rules, get in the good habit of maintaining accurate records and retaining receipts.
The TCJA has a lot of businesses seeking guidance on how to amend their bookkeeping in preparation for upcoming tax filings. Count on our knowledgeable services here at MiklosCPA to help your business meet those needs. We are a California-based accounting firm that helps small businesses with their tax and accounting needs. Reach out to us if you are interested in learning more, and follow our social media for more “good to know” articles like this.