As a result of the new tax act that passed on December 22, 2017, many of you may be wondering if there are things that should be done now to ease the burden of the new compliance rules. Although we are anxiously awaiting more guidance regarding many provisions of the new law, the accounting for meals and entertainment expenditures is one area where businesses need to take immediate action.
Under the new law, costs for entertainment are no longer deductible. Under the old rules, entertainment costs and most meals were 50 percent deductible. Due to the similarity in treatment, most business owners recorded meals and entertainment together in the same general ledger account. However, under the new rules, these two types of expenditures will no longer be treated in the same fashion. As a result, businesses need to record entertainment expenses in an account separate from meal expenses. This change should be made effective for all entertainment expenditures paid or incurred after December 31, 2017. Be aware that meals associated with entertainment activities are still 50 percent deductible. For example, if a business owner attends a hockey game with a group of clients, the cost of the hockey tickets would not be deductible, but food and beverages purchased before, during or after the game will be 50 percent deductible.
Office Meal Changes
In addition to the change in the treatment of entertainment costs, the new tax act also makes some changes to the rules regarding the deductibility of certain types of meals. In 2017 and prior years, meals provided to employees on work premises that were deemed to be at the convenience of the employer were 100 percent deductible. An example of this type of meal would be where an employer provides pizza to employees who are working after hours to meet a deadline. Under the old rules, this type of meal would have been fully deductible, and might have been tracked in a separate general ledger account. Under the new rules, this type of meal is 50 percent deductible. Therefore, a separate tracking of “on premises meals” is no longer necessary. Starting in 2025, these meals will not be deductible at all, so separate reporting will become necessary down the road.
The only meal expenditures that would be fully deductible under the new tax rules are those provided at office holiday parties. There is no guidance on what holidays qualify for this treatment, or if there is a limit to the number of holiday parties that can be held during a year. Therefore, expenses associated with holiday parties should be recorded in a separate general ledger account from non-deductible entertainment costs and 50 percent meals expenditures.
Set Up Separate Accounts
To summarize, every business owner should have a general ledger account to record entertainment costs, and this account should capture things like golf fees, sporting events, or theater events to name a few. A second account for 50 percent deductible meals should be set up to capture meals associated with travel, entertainment, or in-house meals provided with meetings or for employees working late. Lastly, another account should be established for holiday parties for employees. Please remember that although the limits on deductibility for meals have changed, the substantiation requirements have not changed. To ensure deductibility of meals expenses, please make sure you are maintaining records which include the amount of the expense, the time and place of the expense, the business purpose of the expense, and the relationship with the person for whom the meal is provided.
If you have any questions about the treatment of meals and entertainment expenditures under the new tax act, please reach out to your CSH representative.