Understanding the Tax Cuts & Jobs Act: Entertainment Expenses

Since the recent signing into law of the Tax Cuts and Jobs Act on December 22, 2017, the CK team has received many inquiries about its effect on future tax burdens. According to a recent survey from HubSpot, 88.5% of small businesses don’t understand the full impact of the tax bill. It’s apparent that business owners are seeking more clarity. As your trusted business advisors, we hear you loud and clear. To help you get through this transition, we will be posting our latest insights into the effects of the new law. You can subscribe here to receive our weekly email updates.

The first topic we’d like to address is the elimination of tax benefits for entertainment expenses. We don’t yet have clarifying regulations from the government, but we can’t delay on identifying this significant change that will affect businesses and individuals starting after December 31, 2017.

Under prior law, business entertainment expenses were generally 50% deductible for tax purposes, as were expenses for business meals. Under new rules, the following are NOT deductible:

Even if entertainment expenses are related to your trade or business, these items are no longer deductible. We expect that as a result of this change, businesses will now take a closer look at how sales promotion expenses are budgeted for.

What actions can be taken? As many businesses have grouped meals and entertainment into one account, we recommend that you create separate accounts for these expenses. Also, if you are reimbursing employees’ business meals and entertainment expenses, be sure that your employees are educated on the need to account for these expenses separately. After all, business meals are still 50% deductible.

Recent IRS examinations have shown us that entertainment expenses have been a frequent target of auditors. Given the law change, we expect that these expenses will continue to be an area of emphasis during an audit. Getting your internal recordkeeping and accounting policies updated will help counter proposed adjustments in the future.

If you would like to discuss how to better account for your business entertainment expenses, please don’t hesitate to contact us.

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