The Trump Tax Plan, effective 1/1/2018, eliminated the deduction for any activities generally considered entertainment, amusement or recreation.
You can still continue to deduct 50% of the cost of meals if your or your employee is present and the food and beverage are not considered lavish or extravagant. The meal could be with a potential or current customer, client, consultant, vendor or similar business contact.
Prior to 2018, a business could deduct up to 50% of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business. No more.
The Treasury Department is expected to publish proposed regulations to give us more specific information about the meals deduction. Meanwhile, though, they have just issued Notice 2018-76.
One of the things highlighted in the notice is that entertainment, no longer allowed, isn’t defined under the Trump Tax Plan. But just know you can’t deduct it. So the IRS has determined that isn’t always objective.
For example, a non-deductible entertainment expense would normally be anything that satisfies the personal, living or family needs of an individual. That could mean food, beverages, a hotel suite or a car for use of your family. It does not include activities that, although needed for living, are because of work. Work expenses would include things like dinner money provided when an employee is working overtime, a hotel room when an employee is traveling or an auto used in the active conduct of business. The same expenses, meals, hotel and auto, while on vacation wouldn’t be deductible.
You have to look at the purpose for the expense, the notice tells us. For example, if you go to the theater, that’s normally considered entertainment. If you take a client, it used to be deductible. Now it’s not. However, if you’re a professional theater critic and you’re attending the performance so you can critique it, that’s a legitimate business deduction.
If you go to a fashion show and you are a manufacturer or buyer of dresses for a store, that would not be entertainment. If you sell appliances and you take your customers to a fashion show, that’s a non deductible expense.
The new rules are more strictly applied to meals as well. You can deduct 50% (the 100% meals deduction for the convenience of the employer is gone) of the meal expense if:
- The expense is an ordinary & necessary expenses paid while carrying out a trade or business,
- The expense is not lavish or extravagant,
- The taxpayer (or employee) is present at the furnishing of the food or beverages,
- The food or beverages are provided to a current or potential business customer, client, consultant, vendor or similar business contact, and
- In the case of food or beverages provided during the entertainment activity, the cost of those are separate from the cost of the entertainment.
The IRS is very clear that you can’t inflate the cost of food and beverages to try to circumnavigate the no-entertainment deduction rule.
We will see proposed regulations in the future. But, for now, we have something to go on.
The biggest thing for now is to be ready to prove that your meals have a business purpose, not entertainment purpose, who you were with and the business purpose for that and that the meal is not extravagant. It’ll be interesting to see the Tax Court cases that eventually come out of that. One person’s regular dinner would be another person’s extravagance.
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