Allowable tax deductions help a business to reduce its taxable income and hence the tax burden. However, with the introduction of the Tax Cuts and Jobs Act of 2017, some of these deductions are eliminated or reduced by some percentage. One of the main change that was introduced by this act is the deductibility of entertainment and meals expenses. For more than two decades, businesses were allowed to deduct 50 percent of their entertainment and meals expenses related to the business. Effective 2018, the rules have proven to be stricter than ever before because taxpayers are allowed to deduct less of these expenses.
In line with these changes, you should know that entertainment expenses are completely nondeductible and most meals are only 50 percent deductible. Before this Act, entertainment expenses were 50 percent deductible, and almost all meal expenses were 100 percent deductible. Our Atlanta tax experts believe that the IRS will extensively inspect your expenses in regard to these reforms and therefore you must ensure your employees and business associates understand every bit of the new tax rules. They must learn and practice on how to classify every activity and expense involved to avoid being on the wrong side of the law. Below is a clearer insight of Tax Cuts and Jobs Act of 2017 for your consideration.
The new tax reforms, effective 2018 requires you to categorize entertainment and meals expenses as shown below.
- Meals are taken with a fellow employee or a client
When you share a meal with other employees or clients and discuss things that are related to the business, this meal should be classified under the meal tax listing, and the expense thereof is 50 percent tax deductible. However, if the meal shared does not include any business discussion, it does not constitute a tax-deductible expense and should be classified as entertainment.
- Meals during travel or celebrations
Every meal taken during business travel is classified under the meal category, and it is 50 percent deductible. When a business holds activities and events such as birthday parties, holiday, picnics and anniversary celebrations, the meals taken are fully deductible. Our Atlanta tax experts, however, warns that you must indicate the right classification for such meals to qualify as 100 percent deductible expense. In this case, the expense should be categorized as meal - celebratory.
The new tax reforms as stipulated under Tax Cuts and Jobs Act of 2017 prohibits businesses from treating entertainment as a deductible expense. Entertainment expense in this context refers to any cost incurred for amusement or recreation, and this includes sporting events, theatre tickets, fishing, golf outings or any other activities that seem like entertainment. Unlike, the meals’ tax reforms, it doesn’t matter whether you were discussing things related to business or not because the Act is very strict on the no deductibility rule. However, there is one exception to this rule whereby entrainment activities can still be deductible only if they are principally created to benefit employees. While this sounds like a good thing, you should know that there are few limitations to this exception.
While you may be wondering why these rules were introduced, our Atlanta tax experts believe that IRS wants employers to cut on entertainment cost and allow people to focus on productive business discussions. If you need more clarification concerning the new tax reforms, feel free to contact our team.
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