Entertainment Expense Deductions – Rest in Peace
Before the Tax Cuts and Jobs Act, taxpayers could deduct 50% of legitimate business expenses classified as “meals and entertainment.” Under the newly passed law, taxpayers are no longer able to deduct any expenses related to entertainment, amusement, or recreation; other expenses associated with the use of a facility for entertainment-like activities are also deemed non-deductible. This new change further includes membership dues or fees paid to any social, athletic, or sporting club/organization; these expenses fall under the category of “entertainment facility” and are no longer deductible.
On the bright side, some expenses are exempt from this change (IRC Section 274(e)) and are still deductible. These expenses include (1) food and beverages for employees, (2) expenses treated as compensation, (3) reimbursed expenses, (4) recreational expenses for employees, (5) expenses for business meetings, (6) items available to the public, (7) business leagues, and (8) entertainment sold to customers.
Expenses for food, beverages, and facilities used in providing these goods to employees qualify for full deductions as long as such facility and food/beverage event are both furnished on the taxpayer’s business premises. This exception applies not only to company cafeterias and executive dining rooms, but also to expenditures related to operating such facilities.
For any meal and entertainment expense treated as compensation to the employee and included in the employee’s gross income, the amount paid is deductible by the employer as compensation. This includes amounts paid for membership in any club —as long as the entire amount paid is included in the employee’s gross income, the employer can deduct the entire amount as “compensation expense.”
Expenses incurred by a taxpayer that are reimbursed by another party are exempt from the tax law change. This typically occurs when a taxpayer picks up the bill at a client lunch and the meal’s cost is included in the amount billed to the client; in this case, the taxpayer may record a full deduction.
Any expense relating to a recreational, social, or similar activity primarily for the benefit of non-highly compensated employees are not subject to limitation and fully deductible. These activities include holiday parties, summer outings, or annual dinner events. In addition, expenses for the use of a facility for these activities (such as a swimming pool, bowling alley, golf course, etc.) are fully deductible.
Expenses incurred by a taxpayer which directly relate to business meetings of employees, stockholders, agents, or directors are fully deductible. Also, expenses directly related to attendance at business meetings or conventions are considered fully deductible.
Expenses for goods, services, and facilities made available to the public (e.g. cookies or soft drinks available free of charge in a business’s lobby or free samples offered from a bakery) are fully deductible.
Business meetings or convention for any organization described in IRC Section 501(c)(6) which relates to business leagues, chambers of commerce, real estate boards, and boards of trade.
Expenses for goods or services which are sold for an adequate and full consideration.