Most businesses will find themselves having been affected by the Tax Cuts and Jobs Act, which has made big changes to the laws that govern tax deductions for entertainment and meals. Before the changes came in, businesses could make deductions of up to 50% on entertainment related expenses provided they were incurred as the direct result of active trade conduct or came before or after a significant and genuine business meeting.
Since the changes have come in however, deductions for business expenses related to entertainment, amusement or recreation, are no longer permitted.
What other changes have been made to expenses deductions?
No longer deductible, are social, athletic or sport memberships, with businesses now not permitted to make deductions for the cost of memberships to sports clubs or theatre tickets for example. Previously seen as being expenses incurred in the worthwhile process of relationship building and which have the potential to generate new business leads, with the new laws in place, they are perhaps no longer deemed as such and opinions have changed.
What hasn’t changed?
Activities such as holiday parties and summer picnics are still deductible for businesses, and many activities considered to be for the benefit of non-highly compensated employees, are exempt from the new law and can still be deducted as entertainment, amusement, or recreational expenses.
What will be the impact of these changes to tax deductions?
Of course, it takes more than an opinion to make changes to tax laws, and analysts studying the cost-benefits of relationship building activities with clients, business partners and prospective investors have stated that there has been a clear shift. Now, due to these changes, there could be significant repercussions for businesses. Businesses will begin to see the cost of such activities as team building exercises or meals with clients, increasing without the available deductions.
With the growing cost of such expenses, some businesses may find they need to cut back on them, and only time will tell what the consequences of this may be. On the other hand, some businesses may value these expenses highly and will find paying for them to be worth it, even without the deductions.
Changes to the law surrounding meal expenses:
The IRS – back in May of this year – have since stated that provided a meal is not extravagant or lavish, then 50% of their cost can still be deducted under ‘business meals expenses’. Just as the law stated prior to 2018, if the occasion is being used to discuss business matters and is not unduly costly, then there are no real concerns over deductions.
50% of an individual’s meals that are consumed outside of their usual commute to work, can also still be deducted, and the costs associated with meals that are provided during recreational or social activities for non-highly compensated employees, continue to be 100% deductible.
For more detailed information and guidance about the current changes to meal and entertainment deductions for businesses, you would be advised to seek advice from a professional firm specialising in such tax concerns.