Travel, Meals, and Entertainment (Part 3 of 3)
Updated: Aug 2, 2019
If you’re like most business owners, you understand the importance of breaking bread with your employees, clients, and even vendors. A lot of business takes place over a causal meal or even out on the putting green. Since the enactment of the Tax Cuts and Jobs Act of 2017, deducting Meals and entertainment got a lot more difficult. That's not to say that you need to stop spending money, if that’s how you acquire business, just that you're not going to get the same write off as before.
Types of Meals
Let’s talk about meals for business associates, employees, clients, and the like.
The general rule, is that meals are 50-percent deductible. Now, on your books (you know, your financial statements) you’ll still record the full expense, but there’s an adjustment that takes place during tax preparation that will remove 50-percent of those costs from being deduction; this is something your tax preparer will take care of. Any meal, of course, has to be ordinary, necessary, not extravagant, and in connection with you business. This includes food purchased and held for your employees’ consumption under normal work conditions. Soda is in the fridge, granola bars in the cupboard, etc. ALL 50% deductible!
Exceptions to the 50-percent rule:
Number one (1) if the meals are treated as compensation, they’re fully deductible. Compensation means the meal is getting added to your employee’s W-2 or and a contractor’s 1099. THIS is not common.
Number two (2) recreational expenses for employees, like employee appreciation day or a company-wide picnic. Fully deductible.
Number three:(3) meals made available to the public like in the case of an open-house or other marketing event.
Pre and Post-2018 Entertainment
Taking clients to the ball game, the club, or golfing. Dues paid to the country club (for the most part). All of these are considered entertainment expenses AND prior to 2018 these expenses would’ve been treated similar to meals in that they’d be 50-percent deductible.
Under the new law, however, entertainment is generally not deductible at all. Again, that doesn’t mean you can’t spend money on entertainment if it’s business related, it just means it’ll get adjusted out of your tax return.
There are exceptions to the rule and they’re very similar to those available for meals.
Number one, compensation.
Number two recreated and social activities for the benefit of non-highly compensated employees (right, it can’t just be the CEO and CFO throwing an event for themselves).
Next, are events thrown for marketing purposes that are, again, available to the general public.
Finally, if part of what you sell is entertainment you can deduct the cost of that sale, fully.
Business Gifts! It’s in your nature to show appreciation to employees, clients, vendors, and the like. Maybe you like to give them something on their birthday or around the holidays. Unfortunately gifts are generally only deductible up to twenty-five dollars ($25) per person, per year. Being that we’re located in Orange County and everything’s so expensive around here, I often lament on what a cheesy limitation this is, but some deduction is better than no deduction. One thing to note, the twenty-five dollar ($25) limit doesn’t extend to incidental costs such as engraving, packaging, insurance, etcetera. Furthermore, if a gift is worth less than four dollars ($4), it’s not included in the overall deduction limit for that recipient.
An exception to the gift limitation are promotional items. Promotional items are treated more like a marketing expense because they’ll always bare the company’s logo and/or contact information.