Tax Reform: Impact on Meals & Entertainment Deductions

Written by Robin Bodine, CPA & Sandra Nonnenmocher, CPA, MST

Updated 10/19/2020

Although many individuals benefited from the tax reform, the Tax Cuts & Jobs Act placed stricter rules for meals and entertainment deductions.  Before the tax reform, businesses could potential deduct 50% of entertainment costs which included taking clients to sporting events and golf outings. Under the new law, any entertainment expenses incurred after December 31, 2017, are not considered deductible.

Below is a chart comparing the meals and entertainment deductions with the new tax law compared to the prior law.

 

2017

Old Rules

2018

New Rules

Office Holiday Parties, etc.

100% Deductible

100% Deductible

Entertaining Clients

(Example: Sporting Event Tickets)

50% Deductible

No Deduction

Travel Meals

50% Deductible

50% Deductible

Meals Provided for the Convenience of the Employer

100% Deductible

50% Deductible

 

Meal Expenses 

Typically, meal expenses are generally deductible if they are considered to be ordinary (common), necessary, and if they are directly related to the business. Because meals with clients, prospects, or employees are only 50% deductible if business is discussed and there is no entertainment, it is important to have a separate general ledger (GL) account for meals with subcategories. We also recommend maintaining a log/expense report with the date, time and what business was discussed in order to substantiate the business purpose of a meal.

Below is a breakdown of some of the common meal expenses and what percentage they are deductible.

Note - The final regulations confirm business meals are 50% deductible when incurred while entertaining business associates if the following criteria is met. The food and beverage must be purchased separately from the entertainment or the cost of the food and beverages is stated separately from the cost of the entertainment on bills, invoices or receipts. If the food and beverage cost is not separately stated, the full cost of the entertainment will be nondeductible. The disallowance of the deduction for entertainment expenses applies regardless of whether the cost is related to a trade or business.

 

Meal Expenses

Percentage

Deductible

Traditional recreational employee meals

Example: Christmas Party, Employee Picnic, etc.

100%

Meals to employees at work

Meals must be furnished on employer’s premises for the convenience of the employer and be excludable from employee wages as de minimis fringe. Meals must be furnished to employees from an on-site dining facility such as a cafeteria.

50%

Meal reimbursement for employees traveling for a business purpose

50%

Meals provided to employees included in their compensation

Example: Paid under a non-accountable plan.

100%

(Deductible via Wages)

 

Meals with clients/customers, prospect, or employee?  Yes        

Business was discussed before, during or after the meal?  Yes

There is Entertainment?  No

 

You must be able to support it is a business meeting.

Example: include mentor lunches, referral lunches, employee meetings, customer/client seminars.

 

 

 

50%

 

Meals with clients/customers, prospect, or employee?  Yes

Business was discussed before, during or after the meal?  Yes

There is Entertainment?  Yes

 

Example: The meal occurs before, after, or while attending a sporting event, golfing, Etc. Food and beverages provided during or at an entertainment activity that are purchased separately or the cost is stated separately from the cost of the entertainment are 50% deductible. For example, the cost of a sporting event in a suite with a business contact includes food and beverages, but the cost of the food and beverages is separately stated from the event on the invoice for the suite.  The cost of the food and beverages is 50% deductible.  However, the cost of the entertainment is not deductible. You must be able to prove business was conducted during the meal.

 

 

50%

Meals with clients/customers, prospect, or employee?  Yes  

Business is discussed before, during or after the meal?  No

There is Entertainment?  No

Example: Dinner with a client where no business is discussed.

0%

Meals provided to the public to generate business

Example: Open House, Grand Opening.

100%

 

 

Entertainment Expenses

The Tax Cuts & Jobs Act had a significant impact on deducting entertainment expenses. Prior to the new tax law, businesses could deduct golf outings and sporting events where they took their clients out to nurture their business relations however with the new tax rules, these deductions are no longer available.

Entertainment Expenses

Percentage

Deductible

Entertaining clients/customers

It does not matter if business is discussed or not, if you are entertaining a client/customer it is not deductible.

 

0%

Tickets to sporting events

Includes if business was discussed or if business was not discussed. It also includes if you attend or do not attend the event.

 

0%

Membership fees & club dues

Example: Country Club, sporting fee, golf green fees, gold cart fees, caddie fees.

 

 

0%

 

 

Travel Expenses

Travel Expenses

Percentage

Deductible

Travel for a business purpose

Examples:

  • Cost of travel by bus, car, airplane or train from your home to destination.
  •  Shipping of baggage from your typical place of work to your temporary work location.
  • Dry Cleaning and laundry while on your business trip
  • Car expenses while traveling on your business trip (tolls, parking fees, and standard mileage or actual expense)
  • Transportation from one place of business to another including between the airport/bus station to your hotel
  • Tips you pay for any of these services (For instance, tipping the cab driver)

100%

Travel for a non-business purpose

Example: vacation.

 0%

Travel to and from your main place of work

Example: You can’t deduct the cost to drive to work, take the subway or a taxi to your regular place of work.

 0%

 

So, what does this mean for your Chart of Accounts (COA)?

We recommend categorizing your Meals and Entertainment expenses within your COA into Parent Accounts and creating subcategories for tax deductions and more accurate reporting. Below is an example of what your COA Expense section may look like. We recommend reaching out to your QuickBooks® ProAdvisors or Accountant to help you with setting up or changing your COA.

 

[SAMPLE] Meals & Entertainment Section of COA

Parent Account: Travel

  • Travel for business purposes
  • Travel For non-business purposes

Parent Account: Meals

  • Traditional recreational employee meals (e.g., company picnic)
  • Meals to employees at work
  • Meal reimbursement for employees traveling for a business purpose
  • Meals provided to employees included in their compensation
  • Meals where business is discussed
  • Meals where business is not discussed
  • Meals provided to the public to generate business (e.g., open house)

Parent Account: Entertainment

  • Tickets to Sporting Events
  • Entertainment Clients/ Customers
  • Membership Fees & Club Dues

 

 Meals & Entertainment Deduction FAQ

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