The Party is Over, According to the IRS

Under the new tax law, small and medium-sized companies may need to consider cutting back on entertainment expenses.

Under the prior law, so long as an expense was directly related to the active conduct of a trade or business, you were allowed a deduction for an activity generally considered to be entertainment, amusement, or recreation. The limit was up to 50% of the expense. Starting in 2018, the cost of many types of entertainment expenses will no longer be deductible.

Additional IRS guidance on this subject is expected, however, below are a few examples of how the Act may impact businesses and their employees:

  • Cost of taking a client to dinner before a baseball game would not be deductible. Prior to the Act, the expense would be partially deductible.
  • Cost of employee lunch on premises will be partially deductible, subject to the fifty percent threshold. Prior to the Act, the expense was fully deductible.
  • Cost of providing parking passes to employees at garages near their office would not be deductible. Prior to the Act, the parking cost would have been fully deductible.

Write-offs for business-related meals with clients haven’t changed; they’re still 50% deductible. Which may mean more dinners, and fewer experiences, for business developers wooing prospective clients. Yet businesses still need to be careful: Going to an expensive restaurant or venue with live music could, for instance, fall under entertainment.

While many businesses will continue to attend events with their clients even if these types of expenses are no longer 50% deductible, the cost of doing business just went up.

Whether you are considering the new tax treatment of M&E expenses for 2018 or evaluating how tax reform will affect your overall tax situation, consult with the tax experts at Talley LLP today.