Tax Reform Adjustments to Business Meals and Entertainment Deductions
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For years, businesses were allowed to deduct 50 percent of the cost of business-related meals and entertainment on their tax returns. For some businesses, especially those that rely on entertaining clients, customers, and other associates to keep their business humming along, the deduction for business meals and entertainment was substantial.
Starting in 2018, however, the rules have changed. Here are some things you should know.
Are business meals and entertainment still deductible?
The answer to that question is two-fold. Business meals are generally still tax deductible up to 50 percent of the cost. As of 2018, however, you can no longer deduct the cost of entertainment.
In other words, if you take a client or customer to dinner and a basketball game, you can deduct 50 percent of the cost of the dinner. You cannot deduct the tickets for the basketball game.
What about meals for business travel?
You can still deduct 50 percent of the cost of meals when you or your employees travel.
What is covered by the new rules prohibiting deductions for entertainment expenses?
As a general rule, dining is 50 percent deductible; entertainment is not. When dining and entertainment are combined, it gets trickier.
The new rules still allow businesses to deduct the following expenses:
- Employee travel meals (50 percent deductible)
- Meals provided to employees for the employer’s convenience (now 50 percent deductible; previously 100 percent)
- Office parties and picnics (100 percent deductible)
Can employees deduct business meals as a miscellaneous itemized deduction?
No, employees can no longer claim miscellaneous itemized deductions on their income tax returns, which includes the cost of business meals.
If you are an independent contractor or freelancer, however, you can deduct 50 percent of the cost of your business meals with your business income and expenses. You should claim those expenses on Schedule C.
How might businesses change their behavior under the new rules?
Spending money on entertainment may come under greater scrutiny now that companies can no longer deduct the expenses of pricey entertainment. If entertaining clients really pays off, however, it will likely continue. Spending a couple thousand dollars to potentially make a big sale or business deal with a client is worth it – deduction or no deduction.
If the benefit of the entertainment cost is not as significant, some companies may use tax reform as an opportunity to reevaluate and potentially suspend big expenditures.