We expect you’ve heard by now there’s a new tax law that went into effect on January 1, 2018. The law is commonly known as H.R. 1 Tax Cuts and Jobs Act of 2017. If you’d like to read it in its entirety (or are having issues with insomnia), it is available at https://www.congress.gov/bill/115th-congress/house-bill/1.
Today, we’d like to draw your attention specifically to the section that affects the deductibility of meals and entertainment expenses. (Spoiler alert: You are NOT likely to appreciate these changes.)
Prior to 2018, a taxpayer could deduct 50 percent of business meals and entertainment expenses. If meals were provided through an in-house cafeteria or for the convenience of the employer they were 100% deductible. Effective January 1, 2018, entertainment is no longer deductible. This includes taking a client to a sporting event, concert, and also tickets to charitable benefits or galas. Meals provided through an in-house cafeteria and meals provided for the convenience of the employer are now only 50% deductible. (This changes again in the future, but let’s just talk about 2018 today.)
As of the date of this writing, the IRS has not published specific guidance on this part of the new law. We, and many other experts, interpret the law to indicate that no changes were made to the rule allowing a 50 percent deduction for business meals. Likewise, no changes have been made to the 100 percent deduction for expenses incurred for recreational, social, or similar activities primarily for the benefit of employees (other than employees who are highly compensated employees). HOWEVER, some experts are of the opinion that meals purchased while hosting a customer or prospective customer are no longer deductible.
What does all that mean? What do we recommend?
- Keep copies of all receipts related to meals purchased for business purposes and make notes related to who was present at the meal and the topics discussed. This is best practice for ALL business receipts. Keep detailed notes regarding the purpose.
- Track your expenses carefully. Our recommendation is that you create separate categories for each “type” of meal. Yes, it will require a bit more bookkeeping and tracking now, but by the end of the year when full guidance is available and you’re thinking about your 2018 tax filings you’ll have all the information you need organized and ready. (And, if you’re like me and can’t remember what you had for lunch last Wednesday let alone who it was with and the purpose, you won’t be searching your calendar and emails trying to recall the purpose of a meal.)
Recommended general ledger accounts (categories) for tracking expenses:
- Meals while meeting with clients or prospective clients
- Meals between employees of the company for business purposes
- Meals purchased while on business travel (more than 50 miles from home)
- Meals purchased while attending business related groups (Chamber of Commerce, professional associations, etc.)
- Entertainment (nondeductible)
- Recreational/social employee expenses (includes holiday parties)
Lest you think the 2018 tax law contains only bad news, there are highlights. The standard mileage rate, for instance, has been increased. Business use of a van, pickup track, panel truck, or car is now 54.5 cents per mile as opposed to the 53.5 cents per mile that was allowed in 2017. When they say “every penny counts,” this is when! Be sure you are documenting your business mileage as well as tracking your expenses. Every 19 miles driven for business is over a $10 deduction.