The new American Tax Cuts and Jobs Act has brought some pretty big changes to business meals and entertainment deductions. If you are feeling confused by what can and cannot be deducted and at what percentage, you’re not alone. Let’s start by taking a basic look at some of the new rules and how they may impact your business.
Entertaining clients? No deductions here
The phrase “wine and dine” now has a whole new meaning. Prior to the new tax laws, taking a client to a concert, for example, used to be 50% tax deductible, but is no longer. For some of you, this may not impact your way of doing business, but for others, especially those of you who have relied on that tax deduction, you may need to rethink how you go about entertaining clients (if you decide to at all).
As with any new rule, there is often confusion around terms and definitions. So what exactly defines entertainment? According to Treas. Reg. Section 1.274-2(b)(1), entertainment is:
“An activity of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips.”
So no more sports games or concerts, and those of you who like to do business on the golf course may want to reconsider your approach.
Business lunch to discuss a new product? Partial deductions available
On the flip side, business meals are still eligible for a 50% deduction. So for those road warriors who find it easier to discuss a contract or new product over lunch, those costs still generate some tax benefit. As it goes with all deductions, ensure very clear records are kept for each meal. According to Meredith Kowal, senior manager of R&D tax credit services at Aprio “documentation is increasingly important this year, as it will provide more opportunity to deduct items now considered ‘gray area’ due to the vague rules.”
This is where having an automated employee expense solution is key. Not only will this save your employees time, but it will help with the collection and organization of documentation in one, easy-to-access electronic location. Software with mobile capabilities, such as Concur Expense, allows employees to capture expenses by taking pictures of receipts on their mobile phones and uploading them into the system. Not only does this expidite the expense process but decreases the chance of losing those very important records.
Confusion around compliance?
With any new rule or regulation there is often confusion, which causes issues with compliance. Here are a few tips to set your employees up for success:
- Make sure all your employees understand these new regulations – hold a meeting with those who are most impacted and explain the new rules, and add additional information to your expense policies and procedures.
- Ensure your finance team has a plan in place for how to deal with these expenses, including how to document and store all paperwork and receipts.
- Schedule a mid-year check-in to get feedback on how the new processes are working and clear-up any lingering questions or misunderstandings.
Learn more about the 2018 Tax Cuts and Jobs Act
The few points above are merely a glimpse into the 2018 Tax Cuts and Jobs Act. There is more to how this impacts business meals and entertainment deductions. Education is key when it comes to any changes in business taxes.
Watch our on-demand webinar, The New Rules for Meals & Entertainment Deductions, for even more on this topic. Hear from Ernst & Young's U.S. Meals & Entertainment Practice Leader, Angela Spencer-James, as she discusses the changes in deductibility, what this means for your business, and how to mitigate any risks involved.