Deduction of Entertainment Expenses After the Tax Cuts and Jobs Act

by | Jan 10, 2018

Then he got an idea! An awful idea!
The Grinch got a wonderful, awful idea!
“I know just what to do!” The Grinch laughed in his throat.
“I’ll take their Christmas entertainment fringe dinner,” he spoke.

Signed into law three days before Christmas, the Tax Cuts and Jobs Act of 2017 substantially reduced deductible/tax free fringe benefits, paid or incurred in connection with a trade or business.  To help offset the cost of reducing large corporations’ tax rate to a flat 21%, many kinds of business fringe benefits were reduced or eliminated, including those available to sole proprietors, flow through entities like S corporations and LLCs, and employees.  Grinch-like, Congress even eliminated the few remaining Internal Revenue Code section 274 deductions associated with entertainment, amusement or recreation, including facility costs, food and beverage “related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion … associated with, the active conduct of the taxpayer’s trade or business.”

There are few business relationship builders more powerful, more likely to garner goodwill and future business collaboration, than a few well spent business entertainment dollars on a client or important referral source.  Living in the world of re-election campaigns and lobbyists, perhaps our senators and representatives are detached from this business principle, or perhaps it was one of few ways they found possible to cover a new tax expenditure.  For the rest of business, it is nevertheless a most unpleasant reality to wake up to on Christmas Day.

But let’s read the story to the end!  As told in the Senate Report, remaining is the deduction for 50% of food and beverage expense associated with “operating their trade or business.”  The only express example of a qualifying operating expense given by Congress was “meals consumed by employees on work travel.”  While IRS should issue guidance in the future, there will be other clear examples of food and beverage expenses associated with operating a business that qualify for fringe benefit treatment, deductible by the company and not included in the recipient’s income.  Meeting with clients over a meal to discuss active business issues, and meeting with referral sources to explore business opportunities should be included with these.

Proper contemporaneous documentation of the operating business purpose of the meal, when applicable, should be created, retained and provided with every request for reimbursement.  The value of a deduction is not inconsequential; it can be up to 37% of the allowable expense.  All that is required is a receipt, proof of payment, name of the recipients and a brief description of the operating business purpose.  For example: (1) Dinner meeting with Whoville Corporation president on contract; (2) Lunch meeting with Jane Who, CPA, regarding Grinch client tax planning; and (3) Breakfast meeting with John Who to collaborate on joint marketing on dog sled business opportunity.”  The devil, or Grinch as the case may be, is in the detail.

That’s a noise,” grinned the Grinch, “that I simply must hear!”
He paused, and the Grinch put a hand to his ear.
And he did hear a sound rising over the snow.
It started in low, then it started to grow.
But this sound wasn’t sad!
Why, this sound sounded glad!
Every Who down in Whoville, the tall and the small,
Was singing without any entertainment fringe benefits at all!

Should you have any questions regarding entertainment expense deductions, or other tax issues, please contact Harden Law.

  Excerpts are from “How the Grinch Stole Christmas,” Theodor “Dr. Seuss” Geisel, Redbook (magazine), Random House. October 12, 1957.  Final lines in both excerpts were adapted.

Disclaimer: This alert has been prepared for informational purposes only and should not be considered legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney/client relationship.