By Patrick Kautzman, CPA, Partner, Eide Bailly LLP
One of the key provisions of the act is the change in deductibility of entertainment, meals and transportation fringe benefits, beginning in 2018.
Before tax reform took effect, businesses could (in general) deduct 50 percent of business-related entertainment and meals. Employee meals provided by an employer for convenience on the premises were fully deductible. Qualified transportation fringe benefits were also deductible, even if they were excludable from the employees’ taxable income.
Tax reform has changed a lot of that. Here are a few things to watch for:
- Entertainment, amusement or recreation expenses, membership dues for clubs and expenses for facilities related to these items are no longer deductible. This takes affect for all expenses incurred starting January 1, 2018.
- Meals associated with operating a business, including meals during employee travel will stay 50 percent deductible.
- Employee meals provided by an employer on its premises are now only 50 percent deductible through 2025. After 2025, these expenses are no longer deductible.
- Qualified transportation fringe benefits and some expenses related to commuting transportation for employees are no longer deductible.
As you can imagine, there are several questions that have come up in relation to these new guidelines. Further, some of the act’s provisions are not entirely clear and further guidance is needed by the U.S. Treasury or the IRS.
Here are a few examples of questions we’ve encountered.
- You take a client golfing. This entertainment expense is no longer deductible after 2017. The same is true for a baseball game, theater tickets, etc.
- You take a client to dinner prior to, or after, entertainment. Typically, this is non-deductible as it is part of an entertainment outing. However, if you can clearly separate the meal as a business purpose and the meal cost is not lavish or extravagant, you can take a 50 percent deduction on the meal cost. As a reminder, documentation is always important when you take deductions.
- You throw an occasional holiday party for your employees. The act has not changed this and you can fully deduct the costs associated with this.
- Your employees incur meal expenses while traveling on company business. This is deductible at 50 percent, as long as the expense is not lavish or extravagant.
- You have a meal during a meeting for a service club. The meal itself is deductible at 50 percent. However, the dues for service club membership are non-deductible, given the current wording in the act.
- You provide your employees transit passes or parking. These items are no longer eligible for a deduction after 2017. This also applies to providing transportation for an employee to commute to work.
Again, these are just a few of the examples we have encountered and each situation truly depends on your unique set of circumstances. It’s best if you have specific questions to consult with your CPA.
So what steps should you take?
Here are a few tips:
- Look at your bookkeeping procedures for your company. How will you capture expenses differently in 2018 and beyond?
- Make sure you’re documenting and correctly tracking expenses. This impacts ALL expenses from January 1, 2018 on.
- Review your expense reimbursement policies. There’s a pretty good bet that some of the language in there needs to change to comply with the new tax reform act.
Ultimately, your course of action will vary based on your particular circumstances as well as updates from the IRS. If you have questions, ask your business advisor or CPA. The new tax reform act can be complicated, but we can help ensure your business is on track and maintaining your books correctly.
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