Previously, 50% of the expenses associated with entertaining clients was deductible if the taxpayer could establish that the expense was directly related to (or in some cases associated with) the active conduct of the taxpayer’s trade or business. However, and effective for amounts paid or incurred after December 31, 2017, these expenses are no longer deductible for tax purposes.
Frequently, taxpayers have a general ledger (“GL”) account named “Meals and Entertainment.” Under the pre-2018 law, this provided adequate information for tax return purposes, because with only a few exceptions, both meals and entertainment were 50% deductible. However, for amounts paid or incurred on or after January 1, 2018, taxpayers should consider differentiating these items (e.g. keep separate GL accounts for meals and entertainment) to maintain more accurate and transparent records.
Please note that Congress did not eliminate all deductible entertainment expenses. For instance, expenses of providing recreational, social, or similar activities (including the use of a facility) for your employees was and still is 100% deductible. The benefit of the activity must be primarily for your employees that aren’t highly compensated. For example, the expenses for food, beverages, and entertainment for a company-wide picnic or holiday party aren’t subject to any limit as long as such expenses are not lavish or extravagant.
Note: Fiscal-year taxpayers don’t need to make a change retroactively for items paid or incurred in calendar year 2017. Those items are still 50% deductible.
Charitable Contributions for Seating Rights
Paralleling the repeal of certain entertainment deductions, Congress also repealed an Internal Revenue Code provision regarding charitable contributions related to seating rights. Amounts paid or incurred after December 31, 2017 by the taxpayer to or for the benefit of an educational organization for the right to purchase tickets for seating at an athletic event are now also fully disallowed. Previously, 80% of the donation was allowed as a charitable contribution deductible for tax purposes.
Most taxpayers won’t have to modify their recordkeeping for this change, because taxpayers usually account for this item in charitable contribution and/or entertainment accounts. Aside from its own account, these expenses would probably be most appropriately accounted for under an entertainment account.
To improve accuracy and efficiency of your tax return preparation please review your accounting records to ensure that nondeductible expenses are easily identified.
If you have any specific questions or concerns, please contact your trusted advisor at: