Entertainment Expenses Under New Tax Reform Are Not That Entertaining

by | Jan 22, 2018 | Emerging and Growing Business, Nonprofit Organizations

Business lunch

Lawmakers finally did it.

First, they reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent.

And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.

For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment. While the dinner might still be 50 percent deductible (more on that below), the entertainment is definitely not.

Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or other specific business benefit.

The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.

Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer deductible:

  • Business meals with clients or prospects
  • Golf
  • Skiing
  • Tickets to football, baseball, basketball, soccer, etc., games
  • Disneyland

Currently, the CPA community is mixed on whether the elimination of the deduction for entertainment expenses applies to business associate, referral source, client, customer, prospect, etc. business meals. We believe the answer may be that these meals are no longer deductible with Tax Reform. The deduction of these types of meals and any related or unrelated entertainment was provided for via IRC Sec 274(a) and the language allowing for those deductions has been removed. It may be prudent to hang on to your receipts just realize that there is a very good possibility that the meals will no longer be deductible. This will be clarified by the IRS in due time.

If you would like to discuss this further, please call me at 925-954-3213