The Tax Cuts and Job Act of 2017 brought many changes to longstanding business practices and their tax liability.
One notable difference for businesses is how they can deduct yearly expenses related to meals and entertainment.
Under prior law, businesses typically could deduct 50 percent of meals and entertainment for clients.
Additionally, if employers provide meals to employees for their convenience, there were varying deductibility rules depending on if it was or was not included in the employees’ gross income.
Under the new law, adjustments to deductibility rules will most certainly change what activities businesses allow their employees to engage in this year and beyond.
WHEW! PARTY STILL DEDUCTIBLE
First, there is no need to put the company summer picnic or holiday season party on hold.
Expenses related to office holiday parties and picnics are still 100 percent deductible, provided the events are solely for employees and their significant others.
Check the rules if you are inviting vendors, customers, friends or other business-related people.
The deductibility related to these attendees is limited and requires documentation should you be subjected to an audit. This area of tax law has not changed.
ENTERTAINMENT DEDUCTION ENDS
When it comes to the entertainment of clients, the favored rule of many businesses has now become a harsh zero for deductibility under the new regulations.
Regardless of whether or not it is for business-related matters, there is no longer a deduction available for client entertainment, amusement or recreation. This rule also extends to membership dues for any club organization used for business, pleasure, recreation or social purposes.
The days of deducting the cost of a day on the golf course with a client, taking a client to the theater or sending a client to a baseball game are over.
Regardless of the entertainment activity or the amount of business conducted while participating, the activity will no longer hold its prior 50 percent deductibility. This particular item is causing a nuisance for small and large businesses alike in how they compete for business.
MEALS STILL AT 50 PERCENT
Meals for businesses purposes, whether related to employees traveling or as a gesture for your clients, will use deductibility rules similar to those in the past.
Businesses may deduct 50 percent of the cost of meals related to employees traveling for business purposes or for taking clients out to dinner.
Meals with clients must still involve proper business discussions to meet the 50 percent deductibility.
However, be wary of mixing meals with entertainment. The rules clearly state that if you are having a meal at, for example, a sporting event, then it is not deductible.
GENERAL LEDGER ACCOUNTS
Tax reform has brought many changes. It is important for businesses to review these rules and ensure they are meeting the requirements.
For accounting departments, a good way to save some time before tax season is to create new general ledger accounts that capture these different expense rules.
Amy Leibenguth, a Certified Public Accountant in Fogelsville, holds a Master of Business Administration. She is manager of finance and administration for Sapphire Software, a kindergarten-12th grade software application provider. She can be reached at firstname.lastname@example.org.