Many are still torn on how the Tax Cuts and Jobs Act will help or hurt U.S. small businesses, but there is one change that would have a sweeping effect on most startups: The more rigid restrictions on what businesses can deduct for meals and entertainment expenses (M&E).
These stricter limits affect spending on any dining, grocery, celebrations, etc. that took place starting January 1, 2018. For companies that rely on these benefits to attain and retain employees and customers, this may be a big blow.
Change #1: Expenses for Entertaining Clients Cannot Be Deducted at All
Taking a client out for dinner or drinks, or to a show or event has been a time-honored tradition in business. It seemed like a no-brainer—the client was happy, and you could write it off at 50%, so your accountant was happy too.
But under the new rules, client entertainment expenses are a thing of the past, meaning the time has come to reevaluate how you justify this relationship-building tactic in your budget. This means if your business incurs expenses for amusement, you can no longer claim a 50% deduction. These activities include things like golf outings, sporting events, concerts, hunting and fishing trips, and country club dues.
Client meals are still a gray area:
U.S. CPAs are still interpreting whether eliminating the deduction for entertainment expenses applies to business meals. Without further guidance from the Congress or The Department of the Treasury, it’s best to stay on the safe side and consider meals with business associates, clients, customers, prospects, or anyone other than employees nondeductible.
Change #2: Employee Meals Are Half As Tax-Deductible As They Used to Be
In the good old days—as in just a matter of months ago—meals provided for team members at the convenience of the employer were 100% deductible. Starting in 2018, employers will only be able to deduct 50% of what they spend to keep their team members’ tummies full.
Examples of these types of meals include catered lunches, company cafeterias, meals for company meetings, or food provided to enable an employee to work overtime.
What’s more is that, under the new laws, the deduction will be gone completely after 2025. So, unless Congress makes future changes, employers will no longer be able to deduct on-site employer-provided meals at all.
So far, there will be no change to deducting travel-related meals.
Same Old: The Office Party Remains Intact
The new tax law still permits a full 100% deduction for expenses associated with recreational or social activities for employees, including holiday parties, summer outings, team bonding, etc. This would not include an event that is primarily for clients even if employees attend. Basically, this means, you need to be able to prove that the event primarily benefits the employee.
Cheat Sheet: 2018 Guide to Writing Off Meals and Entertainment
The following table outlines different activities and expenses, how to categorize those expenses, and how the law is changing the way you can deduct meals and entertainment expenses starting with your 2018 tax return:
Examples of Meals and Entertainment
|Business Entertainment Trips or Events (sporting events, concerts, fishing trips, country club dues, movies, etc.)||50% deductible||Nondeductible||Entertainment|
|Tickets to Charitable Events||100% deductible||Nondeductible||Entertainment|
|Business Meals (with associates, clients, customers, or prospects)||50% deductible||Nondeductible||Entertainment|
|Employee Travel Meals||50% deductible||50% Deductible||Travel Meals|
|Meals for Business Leagues (Chambers of Commerce, Boards of Trade, etc.)||50% deductible||50% Deductible||Travel Meals|
|Meals for Meetings (with employees, stockholders, agents, or directors)||50% deductible||50% Deductible||Office Meals|
|Meals Provided for Convenience Of Employer||100% deductible||50% Deductible||Office Meals|
|Employee Events (holiday parties, summer outings, and other social/recreation activities)||100% deductible||100% Deductible||Company Events|
|Office Snacks & Beverages||100% deductible||100% Deductible||Groceries|
Quick Answers to Your Questions About Meals and Entertainment Deductions:
Q: Which percentage of business meals is tax deductible?
A: You can write off the meals you purchase for your team (people who are employed by your business) at 50%. You should be cautious about trying to write off meals for clients or networking connections—anyone outside of your organization.
Q: Which percentage of business entertainment expenses is tax deductible?
A: You can write off 100% of your employee entertainment event expenses, such as a holiday party or summer soiree. You cannot write off any percentage of your client or prospect client entertainment expenses, as those client perks are no longer deductible.
Q: Can I write off groceries on my taxes?
A: Yes—groceries are still 100% tax deductible. So, go crazy and stock that fridge with Red Bull!
Q: Which business meals can I write off on my taxes?
A: You can deduct catered lunches, company cafeterias, meals for company meetings, or food provided to enable an employee to work overtime at 50%.
Q: Can I still write off my food and dining for work trips?
A: Yes—work-related travel meals are still 50% deductible as they were before the new tax reform. Carpe Per Diem!
Quick Note: This article is provided for informational purposes only, and is not legal, financial, accounting, or tax advice. You should consult appropriate professionals for advice on your specific situation. inDinero assumes no liability for actions taken in reliance upon the information contained herein.