The Tax Cuts and Jobs Act passed last December includes big changes in the deductibility of meals and entertainment expenses for businesses. The changes in the law may mean you need to change the way those expenses are recorded in your books.
First, let’s look at what didn’t change in the new tax law:
Travel meals remain 50% deductible.
Meals in travel status are also still 50% deductible.
Recreational or social activities for employees remain 100% deductible.
Expenses with a recreational or social activity for the benefit of employees are still fully deductible. This includes fees for the use of facilities — such as a gym — but not club dues. As before, expenses for the exclusive benefit of highly compensated employees are not included and are not deductible. This means that you can still throw a holiday party for your staff and deduct the entire expense.
Now, let’s look at what did change in the new tax law:
No deduction for entertainment.
The biggest change is the loss of deduction for entertainment expenses. Previously, businesses could deduct 50% of their expenses for treating clients or prospective clients to golf, theater or concert tickets, sports events, fishing and hunting trips, visits to a spa and similar perks. Starting on January 1, 2018, none of that is deductible.
Meals for the convenience of the employer only 50% deductible.
Businesses also lost 50% of their deduction for employee meals for the convenience of the employer. Under the previous law, when an employer brought in food or paid for food for employees so that they could work longer hours, those meals were fully deductible as a de minimis fringe benefit. Now those same meals are only 50% deductible. And starting in 2025, those meals aren’t deductible at all.
This same new limitation also applies to meals provided at an onsite cafeteria or dining facility.
Here’s what’s uncertain:
Business meals 0% or 50%?
The status of meals with a business purpose is unclear. As the law was passed in December, it appears that this deduction has disappeared, but a technical correction to the law could bring back the previous rate of 50%. Business meals include taking a client or a prospective client out to eat, lunch meetings with co-workers, and attending luncheon meetings. To be on the safe side, we recommend you track these expenses separately.
How to record these in your books
These changes make it even more important to track these expenses in separate accounts in your books. We recommend that you set up separate GL accounts for:
- Travel meals (50% deductible)
- Entertainment (0% deductible)
- Recreational and social activities for employees (100% deductible)
- Business meals (deductibility uncertain)
Note that meals during travel need to be split out from the rest of your travel expenses. If meals are charged to a hotel room, the portion of the bill for meals needs to be split out when the bill is recorded in your books. This means you’ll need to provide your bookkeeper with the itemized bill from the hotel, not just the credit card bill showing the total for the room and items charged to the room.
By separating these expenses into their own accounts, you’ll make tax preparation and tax planning simpler. You can also be sure you’ll get the maximum deduction you’re entitled to.
Do you have questions about the new tax law and which meals and entertainment expenses are deductible? Are you wondering about the best way to record those expenses in your books? Contact us today.
Schanel & Associates is a CPA firm specializing in accounting, tax, business valuation and litigation support serving Palm Beach, Martin, and St. Lucie Counties and beyond since 1993. Our CPAs and accounting professionals work with individuals, businesses, estates, and trusts to provide everything you need under one roof. For more information, contact us today at 561-624-2118.
Glenn Schanel is the founding Principal of Schanel and Associates. Glenn Schanel is a CPA with over three decades of experience helping people and organizations manage, make sense of and benefit from their finances. He oversees areas that include auditing, accounting, tax, business valuation, forensic accounting, litigation support and other consulting services to both business and individual clients.