I’ve been thinking about how much those changes affect businesses and employees since I’m in Vegas–yes, on a business trip. And while what happens in Vegas stays in Vegas, that’s not so true when it comes to business-related expenses. As part of the Tax Cuts and Jobs Act, there have been changes to the deductibility of business-related meals and entertainment expenses. Here’s what you need to know.
Under prior law, businesses could deduct business-related expenses, including travel and certain business meals and entertainment. And under prior law, an individual taxpayer could deduct unreimbursed job expenses, including “travel, transportation, meals, entertainment, gifts, and local lodging related to your work.”
The last part? That’s no longer true. Individual taxpayers may no longer deduct unreimbursed job expenses. So if your employer doesn’t pay for travel, transportation, meals, entertainment, gifts, and local lodging related to your work, you may not claim a deduction for those expenses. Yes, even if you’re out of pocket. And yes, even if it’s 100% related to your job.
(That’s true for all unreimbursed job expenses, including the home office deduction. For more, click here.)
The impact of the elimination of unreimbursed employee expenses will be felt by taxpayers who normally itemize on a Schedule A (you can see what Schedule A might look like here). It will not impact business owners, including freelancers, who file a Schedule C, since those expenses are considered business-related. However, there are some restrictions under the new law that will affect businesses and business owners. Most notably, the deduction for entertainment, amusement or recreational activities has been eliminated, and the deductibility of some meal expenses are now limited.
Under prior law, the rule was that you could deduct 50% of entertainment, amusement, or recreation expenses directly related to your trade or business. That is no longer the case: There is no deduction for entertainment.
Also under prior law, expenses for meals were generally deductible at 50% so long as they were connected to business and otherwise met the deductibility criteria. Until recently, that included business meals with clients. Business-related meals are still generally deductible at 50%. However, there is a great deal of confusion under the new law about how far that extends. Some tax pros believe that the language in the TCJA completely eliminates the deduction for meals with clients, customers, and potential referrals. Others take the position that meals are deductible, but meals that tied to nondeductible entertainment (think dinner at a show or lunch during a ballgame) might not be. Still, others believe that if you can easily separate the two for accounting purposes, meaning that you can carve out the meals from the entertainment, the meals are deductible. Tax pros have asked the Internal Revenue Service (IRS) for clarification on this issue (you can read the AICPA’s letter, which downloads as a pdf, here). Until we have some real guidance, you’ll want to use caution.
Meals which are treated as compensation to employees (meaning that fat Wagyu dinner shows up on a form W-2) remains 100% deductible to the employer. The same is true for reimbursed expenses (but see above again regarding unreimbursed expenses).
What about those de minimis fringe benefits? Those coffees and group meals that employers offer to employees were traditionally 100% deductible. That’s because the IRS considers these items “so small as to make accounting for it unreasonable or impractical.” In fact, the Latin phrase de minimis translates roughly to “of little importance”–which means the IRS clearly doesn’t know how I feel about coffee. Now de minimis employee food and beverage expenses appear to be 50% deductible (again, tax professionals have asked for guidance on this issue).
Confused yet? Good. We all are. While the deductibility of some business and travel-related expenses remains settled (more on those later, I promise), the lack of clarification in this area is causing some sleepless nights in the tax world. For now, here are the takeaways:
- First, pay attention. I expect clarification on these issues, but we’re already through half of the year. Last-minute changes and guidance may have important consequences on Tax Day. You don’t want to be taken by surprise.
- Second, get a good tax professional. I know that you don’t have time to read every piece of guidance from IRS or to analyze the language in the TCJA over late-night cocktails. You’re busy running a business, right? Leave that to the folks who like doing this for a living.
- Finally, it’s more important than ever that you keep excellent records and annotate where appropriate. You should include the date of the event, the type of the expense and who was with you. It’s also a good idea to write down the purpose of the meal, including the general topic of discussion. If there’s an entertainment piece, carve it out–separate checks are even better. Of course, you don’t have to include too much information: Some things really should stay in Vegas.