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New Meals & Entertainment Limitations

The time to find out expenditures are no longer tax deductible is before the money is spent, not when the receipts are totaled at year end.  To that end, there has been a major change in allowable deductions beginning in 2018 for meals and entertainment expenses.  Tax deductions for all meals have been limited to 50%, and all deductions for entertainment expenses have been eliminated.

While meals for entertaining customizers or consumed while traveling have been subject to a 50% limitation for many years, there has long been an exception for meals served on an employer’s premises.  Whether those meals are for employee morale, supper money to reward employees for working late, or to encourage them to be available on premises instead of away at lunch, these meals previously enjoyed an exception to the 50% limitation and were 100% deductible.  Beginning in 2018 that exception is gone, and ALL meals are now subject to the 50% limitation.

Even more extensive are changes in deducting entertainment expenses.  Previously subject to the same 50% limitation for external entertainment, with a full deduction allowed for internal entertainment, allowing businesses to fully write off company holiday parties, pig roasts, and similar employee activities.  Likewise, this treatment allowed a partial deduction for entertaining clients and customers at ball games, theater events, fishing trips and the like.  Under new rules in place beginning in 2018 NONE of the entertainment expenses previously allowed are deductible, weather for internal morale or external networking.  There may be some amelioration in the form of reclassifying some entertainment as gifts, but with a $25 limit per recipient, the benefit is minimal.

These changes can have a significant effect on a business’s tax position if these expenses comprise a large portion of tax deductions.  If you have any questions on specific provisions of the new meals and entertainment expense regime, please feel free to reach out to us for a consultation.

Written by Damien Falato, CPA, MST, CGMA, Tax Director

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