Businesses of all sizes have used meals and entertainment as a key part of their strategy for years. Taking clients out to lunch or to the golf course, bringing food in for employees so they can work on a long project, or providing food for employees as a perk around the office. This all sounds like business as usual. Under the new tax reform, some of this is going to change and it’s, unfortunately, not all that clear yet.
Let’s talk about a few of the most commonly used deductions, how they are changing, and how it affects tax strategy for your business:
Holiday Parties and Events
Many companies have holiday parties or end of the year parties with the team. There’s always food involved or it wouldn’t be a party, right? The old rules allowed a 100% deduction of this food expense, and the new regulations do not change this.
What you need to know
One major caution with this deduction is that the event must be open to employees in general, and not limited to the higher-ups and board members. Violating this may disallow the deduction.
The deduction for office party expense may have stayed the same, but you may still need to make an adjustment by creating a separate general ledger account for office party and outing food. This will make it much easier to separate out at tax time, since you may have been lumping it together with expenses that DID change.
Office Snacks and Coffee
Free coffee and snacks can be a great perk and benefit of your workplace. Who doesn’t love coffee and a donut or bagel during a long workday? Some companies added these to the bundle of goodies that made them more attractive to employees, without the need for increased salaries.
What you need to know
Under the old rules, this type of food was excludable to the employee and 100% deductible for the employer. The new changes make these “de minimis fringe benefits” only 50% deductible to the employer.
For some companies, this can be a huge expenditure and the lost deduction can be a very large amount. It may be worth considering reduced office perks and replacing them with monetary rewards that are fully deductible.
Meals with Clients/Prospects
This is the biggest category for most businesses and possibly the biggest change, as well. Taking clients out for lunch or a round of golf used to be par for the course (pun intended). The expense was 50% deductible, based on the assumption that it deducted the client’s portion. Under the new rules, this 50% deduction appears to remain intact. However, entertainment expenses have been disallowed completely. No more theater, golf, or ball game tax deductions.
What you need to know
The language of the new tax reform is not very clear, even to CPAs. That’s something only Congress could manage. Some worry that the entertainment deduction took the meals deduction with it. Others are concerned that any meals with an entertainment component will be completely disallowed instead of being split.
Until we get further clarification on how this will all shake out, it’s best to track all meals expenses and may be wise to sort those with entertainment components in a separate account. That way, it’s easy to get everything you are entitled to when tax time comes around.
Which of these deductions is most relevant to your business? How will you be changing your strategy to fit the new tax reform?
