The recently enacted 'Tax Cuts and Jobs Act' is changing things up for many small businesses. We specifically want to highlight the changes made to the deductibility of meals and entertainment.
Starting in 2018, entertainment expenses are
NOT deductible. This means no more business deductions for golf (ironic considering who signed the bill into law, no?), sporting events or team building entertainment activities.
'Business meals'
are still deductible at 50% of the cost, but as with most rules, there are a few exceptions. So here's some advice on how to better sort/track your expenses in the realm of 'Meals and
Entertainment'.
Whether you are using Quickbooks or a shoebox, it's time to add a few new categories to your chart of accounts or folders. First let's look at the different types of meals, entertainment, travel and other expense categories that we are talking about:
- Entertainment (non-deductible)
- Meals (50% deductible)
- Meals: Celebratory (100% deductible)
- Travel Expenses (100% deductible - does NOT include meals)
- Travel Meals (50% deductible - actual cost OR M&IE Per Diem)
- Membership Dues (non-deductible)
- Dues & Memberships (100% deductible)
- Advertising: Promo & Sponsorship (100% deductible)
- Research & Development (100% deductible)
Let's discuss what expenses you would put in each category above:
Entertainment -
Not only do we not get deductions for business related entertainment, amusement or recreation activities, we also do not get a deduction for the travel to and from these events or tips and parking at the events. The entire experience is nondeductible and should be classified as
Entertainment. But remember, if you discuss business AND have a meal/drinks at the event, you can deduct the cost of the meal/drinks as
Meals.
Meals (with your clients) -
For a meal to be deductible at all, business must be discussed at the meal. If this is the case, you can deduct 50% and should classify these expenses as
Meals. If you did not discuss business, these expenses are not deductible. We suggest making note of topic discussed on the back of each receipt as proof of deductibility.
Meals (with coworkers and business associates) - Meals with business associates, employees and coworkers are deductible at 50% if business is discussed at the
Meal.
No business discussed? No deduction. This does not mean you can't treat your business associate to a meal, it just means that it is nondeductible. So be sure to make a note on what was discussed to file with/on the receipt.
Celebratory Meals -
The only meals that are now 100% deductible are celebratory meals. These are very limited and only include things like your company holiday party, birthday parties, retirement parties or company picnics. Make sure to track these expenses separately from the meals described above, as
Celebratory Meals.
Employer provided 'convenience meals' (meals provided on location so that employees can continue working without leaving office) previously had special 100% deductibility, but no longer! Make sure those go into the regular
Meals category rather than being lumped with
Celebratory Meals.
Travel -
This is just a reminder that your travel expense should NOT include any meal expenses. Travel should only include transportation and lodging expenses while on business trips (overnight trips out of local area). We recommend classifying all meals while on a business trip in its own category as
Travel Meals so that you can more easily decide if a
Standard Per Diem rate would be a better deduction.
Nondeductible Membership Dues -
We cannot deduct dues or memberships paid to any club or organization that is formed for pleasure, recreation or other social purpose. This means no social, athletic/gym, luncheon, sporting, airline, hotel, golf or country club dues. Again, your business can pay for these, but they should be classified as
Nondeductible Dues.
(This isn't new, but a good refresher on the rules.)
Dues & Memberships (Professional) - There are some dues/memberships that are deductible. Chambers of Commerce are specifically deductible, as are dues to professional societies and organizations (in your field), union dues, trade associations and business leagues. Classify these as
Dues & Memberships and there will be a full deduction for these.
Advertising: Promo & Sponsorship -
Event costs may still be deductible as
Promo & Sponsorship even though they have an 'entertainment' component. If you were to either sponsor or host an event for marketing purposes, you could still deduct costs as Advertising, e.g., taking a client golfing is no longer deductible, but sponsoring a charity golf event to get your name in the brochure is still deductible. Or if you follow in the late, great Steve Jobs' footsteps and hire U2 to play at an event to launch your new product, you'd still deduct the cost of hiring the band as Marketing.
Research & Development - Attending events/classes within your field could still constitute Research and be 100% deductible. Certain concerts may be Research to a musician; however, buying that second ticket for a colleague would no longer be deductible as
Entertainment, BUT...the drinks you buy after the show to discuss how you were inspired by concert to collaborate on new album with them would still be 50% deductible as
Meals.
Easy, right?
If you still have questions, we're happy to advise clients during the Summer/Fall months at our hourly consulting rate. Please email info@foxtaxservice.com to set up a phone or in-person consultation.
