While we have provided a lot of guidance about the 2017 Tax Cuts and Jobs Act over the last seven months, we wanted to offer some advice on how to handle a specific area of the Act: Meals and Entertainment.
The change from 50 percent deductibility of entertainment costs to those costs being completely non-deductible falls under Internal Revenue Code (IRC) Section 274. The confusion about the change in this section involves how it impacts the deductibility of business meals with clients, customers and business partners. Whether meals with clients, etc. will remain 50 percent deductible hinges on how entertainment is defined. IRS Publication 463, Travel, Entertainment, Gift and Car Expenses, which has not been updated for 2018, defines entertainment as follows:
“Entertainment includes any activity generally considered to provide entertainment, amusement or recreation, and includes meals provided to a customer or a client.”
An IRS publication is not law, but nowhere within Code Section 274 or the regulations thereunder is entertainment defined. Clearly, guidance is needed to determine whether the definition of entertainment will be so broad as to include meals with customers, clients and other business partners, or if it will be more narrowly defined to only include activities which are purely for amusement.
Pending guidance from the IRS, we would like to advise you to separate meals with customers, clients and other business partners where business is discussed during the meal, into a separate general ledger account. Do not include these meals with entertainment costs like hockey tickets, golf, or show tickets. Also, do not combine these types of meal expenditures with travel-related meals, or in-house employee meals or meals associated with conventions or trade associations. If the costs are tracked separately in your system, it will be easier to apply the correct deductibility rule once we obtain the clarity needed.
If you have questions about how to segregate meals and entertainment costs on your ledger, or if you have other questions about recent legislation, please contact your CSH advisor.