As a result of the federal tax overhaul, businesses in 2018 can no longer deduct expenses related to entertaining clients and prospects, which had previously been 50 percent deductible.
The change calls into question whether business-related meals are still 50 percent deductible. Some experts say no, because they will be considered entertainment, while others say yes.
“When Congress eliminated the entertainment expense, one has to question, Did they eliminate more of the dining expense than they may have intended?” says Mark J. Kohler, senior partner in the accounting firm Kohler & Eyre in Cedar City, Utah, and author of “The Tax & Legal Playbook” (Entrepreneur Press; $19.95). “We don’t know yet.”
The deduction for entertainment was eliminated due to the IRS’ contention that it has a high likelihood of potential for abuse, he says, noting that while there may be some abuse, he feels most business owners used it legitimately.
In the meantime, “we are expecting further guidance from the Internal Revenue Service on what is deductible as a business meal isolated from entertainment,” Kohler says.
According to a recent report from Congress’ Joint Committee on Taxation, the new tax law “changed the rules governing the deductibility of meal and entertainment expenses to generally prohibit deductions for entertainment expenses, including meals and other items, activities, and facilities that constitute entertainment.”
When asked for clarification on meals, IRS spokesman Dean Patterson said in a statement: “The IRS is working on implementing the tax reform law that affects both individuals and businesses. We will provide information and guidance to taxpayers, businesses and the tax community as it becomes available. Stakeholders and taxpayers can find the latest updates on IRS.gov.”
Until then, Robert Goldfarb, principal at Janover LLC, a certified public accounting firm in Garden City, agrees there’s confusion.
“We don’t have a true definition of what entertainment is in terms of meals,” says Goldfarb. His firm is telling clients that the deduction on business meals may be questionable and they need to maintain the records as if the expense was deductible. “That’s going to be a dilemma 11 to 12 months from now,” when firms file their 2018 taxes, he says.
Entertainment, amusement and recreation expenses you treat as compensation to your employees in their wages is still deductible, he says.
But that would have to appear in their W-2 forms, says Goldfarb, noting he’s never encountered an instance where he’s seen entertainment as a form of compensation to an employee.
Eliminating the entertainment deduction for clients and prospects means there will have to be a “complete change in mindset” about sales and business development activities, says Edward McWilliams, a manager at Bohemia-based Cerini & Associates LLP.
Companies may be less quick to purchase sporting event tickets or corporate suites, says McWilliams, who thinks the 50 percent deductibility of business meals will stand outside of an entertainment activity if the meal includes “substantive business discussions.”
But he agrees IRS guidelines are needed.
“I think we’ll see less business done around a Yankee game and more around a dinner table,” says McWilliams.
Ken Laks, a partner at Albrecht, Viggiano, Zurek & Co. in Hauppauge, tends to agree.
“We believe at the end of the day the entertainment piece is eliminated, but there will be a carve-out for meals,” he says.
He would take a conservative approach and avoid co-mingling an event with a meal.
Companies also have to do a better job of keeping receipts, says Ryan Balfe, owner of bookkeeping service Cubepros and a Manhattan-based adviser to The Neat Company, an expense and document management system.
“The importance of keeping track of receipts more than ever needs to be stressed to employees,” he says, noting technology’s made this task a lot easier.
Some meals that are still deductible:
Meals provided for convenience of employer located on employer’s premise (ie. food for staff meetings, on-site cafeteria): Used to be 100% deductible with certain exceptions, now 50% deductible
Employee travel meals: 50% deductible
Food costs related to providing a product or service to a customer (ie. food served at a conference): Still 100% deductible
Source: Mark Kohler