At the end of last year, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (“TCJA”), the largest tax overhaul since the 1986 Tax Reform Act. One of the biggest changes that will impact all businesses no matter how the entity is structured (corporation, partnership, limited liability company, etc.) is the treatment of business meals and entertainment moving forward.
Under the old law, businesses could generally take a deduction for half of their business-related entertainment costs. As a result, businesses took advantage of this to entertain clients at sporting events, concerts and on the golf course. However, beginning in 2018, entertainment expenses are no longer deductible no matter how much (or little) business is actually discussed. Notwithstanding the limitation on deducting entertainment expenses, business holiday parties are still fully deductible.
Another major change made by the TCJA was with respect to business meals. While employee meals on business travel remain 50% deductible by the employer, the new law placed limits on meals provided at an employer-operated eating facility, such as a cafeteria. Under the old law, employers were able to deduct the entire expense, now it is subject to the 50% limitation. Moreover, after 2025, the cost is completely disallowed. The same 50% limit applies to meals an employer brings on-site for employee meetings and other on-premises meals that are provided for the convenience of the employer.
While the above-mentioned changes are fairly straight forward, the deductibility of the cost of client meals has led to some significant debate and remains unsettled. A sharp divide exists among tax practitioners on this issue. Many tax experts believe that client meals, such as at a restaurant for a business dinner, are 50% deductible as long as business is conducted or discussed. However, others take a more conservative position that client meals can no longer be written off based on the changes made under the new law- at least until the IRS comes out with guidance saying otherwise.
Ultimately, it comes down to each business owner’s level of comfort on this issue. While it does appear that some uncertainty exists, we lean towards the position that say client business meals remain 50% deductible, provided the meals are not so lavish that they rise to the level of entertainment.
With that said, if business owners elect to deduct client meals, business owners should track all of their receipts in separate ledger accounts based on the specific type of meal and other specific details surrounding this expense to be able to properly adjust their deductions based on any future IRS guidance.
If you own a business and have not yet undertaken an analysis to determine how the new tax law impacts you, contact us to discuss what the next step is to ensure that you maximize the new benefits afforded to business owners like yourself.