Since the beginning of the year, I have received countless questions from business owners regarding the new Section 199A deduction and if they should consider switching to C Corporation. Understandably, these inquiries are right on the top of their mind along with “How much will my take home pay increase this year?”. These are some of the big-ticket items that are changing this year.
Buried in the new tax laws is a major change to how business’s can deduct expenses to attract new clients or maintain current client relations. Starting in 2018, the meals and entertainment deduction under IRC Section 274(e) has been modified substantially. Although this may not change the decision to embark on these costs of doing business, it will indeed affect your company’s bottom-line.
The biggest change is that, in general, the deduction for entertainment expenses will be eliminated starting on January 1, 2018. This includes expenses incurred for entertainment, amusement or recreation, and certain club dues. Unfortunately, this means that entertainment expenses such as taking your client to a ballgame or golf outing will no longer be deductible. As always with the tax code, there is an exception for entertainment that benefits the company’s employees. So, the annual amount paid by your business for your firm’s holiday party would still be deductible.
Regarding the deduction for meals, in general, the deduction stays at the 50% limitation and is slightly expanded. Starting on January 1, 2018, the 50% limitation is now applied to meals provided for the convenience of the employer (previously this was 100% deductible). In general, this refers to costs of operating an eating facility on premise for employees. This treatment will continue until December 31, 2025. After that, it will be non-deductible.
Starting with the 2018 tax year it will be imperative for companies to document their meals and entertainment expenses in more detail than in the past. In certain cases, the ultimate determination if an expense is a meal or entertainment will have some “gray area” (example: the cost of refreshments at a sporting event could be considered a meal or entertainment). As you can see, the bi-furcation of meals vs. entertainment expenses on receipts will be key for tax deductibility moving forward. As with much of the new tax laws, further guidance from the IRS will be forthcoming, so I will keep you apprised on any new requirements.
As always please feel free to contact me with questions!