In the January edition of the Dental CPAs Newsletter, we listed 15 changes you will see because of the 2018 Tax Cuts and Jobs Act (TCJA). In this issue, we will explain how the tax treatment of Entertainment and Meals Expense has changed under the new law.
Prior to 2018 entertainment was treated as 50 percent deductible for tax purposes. So, if a business spent $1,000 for business-related entertainment and the expense was “directly related” (involved a discussion for generating immediate revenue and not just for goodwill toward a business associate) to business or “associated” with the active conduct of business, they received a deduction of $500 for their tax purposes. Examples include entertaining clients or business associates at clubs, theaters, and sporting events, and at entertainment facilities such as country clubs, hunting clubs or yacht (but does not include the cost of using those facilities).
Under the new law (as of January 1, 2018) there is no deduction for these expenses.
Under the old law business-related meals were 50% deductible however, there were exceptions to the 50% limitation (i.e. meals that were 100% deductible) for meals provided by the employer to more than half of the employees on the employer’s premises which were for the convenience of the employer (e.g. meals for morning huddles). Also if an employer paid for social or recreational expenses for the benefit of employees (holiday parties, summer picnic) those expenses were 100% deductible. As of January 1, 2018, and through December 31, 2025, the definition of business meals which are only 50% deductible has expanded to include employer-provided meals on the employer’s premises and for the convenience of the employer and as of January 1, 2026, they will no longer be deductible. Employer paid expenses for social and recreational expenses for the benefit of employees remain 100% deductible.
Based on these changes we are recommending clients have a conversation with their CPA regarding specific situations and which category they may be expensed under and make the appropriate changes in their chart of accounts to ensure proper tax treatment of the items above.
Below are examples of possible chart of account categories beginning in 2018:
Entertainment – Nondeductible
Business Meals (50% Deductible)
Employer Paid Social and Recreational Expenses (100% deductible)