Understanding Entertainment Expenses Under the Tax Cuts and Jobs Act

One of the new provisions under the now signed Tax Cuts and Jobs Act may have you thinking twice before scheduling a round of golf with you customer. Yes, we’re talking about changes to the entertainment expense deduction.

Previously, no deduction was allowed for ordinary and necessary expenses for an activity of a type generally considered to be entertainment, amusement, or recreation unless the taxpayer established that the expense was directly related to or associated with the active conduct of the taxpayer’s trade or business or income-producing activity. The deduction allowed for entertainment expenses was limited to 50% of the otherwise deductible amount. However, expenses under Code Sec. 274(e) are specifically excluded from these restrictions and are automatically deductible.

The Tax Cuts and Jobs Act repeals the rule that allowed a 50% deduction for entertainment, amusement, or recreation expenses that were directly related to or associated with the active conduct of the taxpayer’s trade or business, but did not repeal the expenses automatically deductible under Code Sec. 274(e).

What does this mean? 

Starting after December 31, 2017 entertainment expenses are completely nondeductible unless one of the exceptions in Code Sec. 274(e) applies. Code Sec. 274(e) expenses are made up of the following:

1. On premises food and beverages provided primarily for employees
2. Expenses treated as compensation
3. Expenses reimbursed to the taxpayer
4. Recreational expenses primarily for the benefit of the employee (except highly compensated employees)
5. Expenses for business meetings for the employees or stockholders or business leagues
6. Entertainment sold to customers
7. Entertainment includible in income of nonemployees, like winning prizes

Meals are still 50% deductible, except for meals provided for company functions, which are 100% deductible.

If you previously combined your meals and entertainment into one account, we recommend splitting the account into two; one for meals and one for entertainment, starting January 1, 2018, while noting any of the 100% deductible exceptions.

Please contact the BerganKDV Team with any questions.