The topic of tax reform has been front of mind for many our clients since its passage on December 22, 2017. While we are waiting for Code and Regulations to provide clarity on many of the provisions included in the Tax Cuts and Jobs Act (TCJA), one area that business need to focus on immediately involves the treatment of meals and entertainment.
Prior to TCJA, entertainment costs and most meals were 50 percent deductible. Because of similar tax treatment under Pre-2018 tax reform, it was not uncommon for businesses to record meals and entertainment in the same accounts.
Under TCJA, costs for entertainment are no longer deductible so these two types of expenditures will need to be handled differently when accounting for income tax purposes. Beginning January 1, 2018, businesses should record entertainment expenses in an account separately from meal expenses. If an entertainment activity includes meals, the meals will still qualify as 50 percent deductible items. For example, if a business owner attends a sporting event with a group of clients, the cost of the tickets would not be deductible, but food and beverages purchased before, during or after the event will be 50 percent deductible.
In addition to the change in the treatment of entertainment costs, the new tax act also makes changes to the rules regarding the deductibility of certain types of employer provided meals. Prior to January 1, 2018, meals provided to employees on work premises that were deemed to be at the convenience of the employer were 100 percent deductible. Under TCJA, this type of meal is 50 percent deductible. Therefore, there is no longer a need to track “on premises meals” separately from meals provided off premise meals.
The only meal expenditures that would be fully deductible under the new tax rules are those provided at office holiday parties. We are currently waiting for guidance on what holidays qualify for this treatment, or if there is a limit to the number of holiday parties that can be held during a year. Therefore, expenses associated with holiday parties should be recorded in a separate account from non-deductible entertainment costs and 50 percent meals expenditures.
To summarize, every business owner should have three separate general ledger account to account for meals and entertainment costs.
- First, one account for non-deductible entertainment
- A second account for 50 percent deductible meals should be set up to capture meals associated with travel, entertainment, or in-house meals provided with meetings or for employees.
- A third account should be established for holiday parties provided for employees.
Although accounting for meals and entertainment has changed, the substantiation requirements have not changed. To ensure deductibility of meals expenses, please make sure you are maintaining records which include the amount of the expense, the time and place of the expense, the business purpose of the expense, and the relationship with the person for whom the meal is provided.
If you have any questions about the accounting for meals and entertainment under the new tax act, please give us a call.