Deductible Meal, Non-Deductible Entertainment, or Advertising Expense?
The Tax Cuts and Jobs Act created a lot of uncertainty around the meals and entertainment deductions. Recently, the IRS has issued some informal guidance regarding the rules, but in some cases, this may not even be a concern.
In general, the current status is that for most of the meals deductions there are little changes. The one major change, which is very relevant to CPA firms, is that meals provided for the convenience of the employer are only 50% deductible, as opposed to 100% previously, but even that has caveats. Changes in the deductions related to entertainment are where the real changes happened. In the past, entertainment expenses were generally deductible up to 50% for entertaining a client or business contact. Now, these are no longer deductible, not even the food and drink unless it is easily separated from the total cost.
A possible planning technique for this lack of deductibility is to look at what benefit you are actually deriving from the cost. If you buy tickets to sit at a baseball game with a client, there is not much room to consider that anything other than entertainment. However, not all expenses are this clear. What if you pay to have your company advertised on the big screen at a sporting event and as part of the package you get 4 tickets to attend the event? Are you paying for the entertainment, the advertising, or both? Clearly there has to be some cost here allocated to marketing and advertising. The key to much of this planning is advertising. Another example unrelated to entertainment – you “donate” money to your child’s sports team. The team informs you they are not a nonprofit and you are not eligible for a charitable contribution. Does it matter? What if the team tells you that in return for your “donation” they will put your company name in the program, logo on their equipment and hang your banner at the field? We all like to think that these expenses are paid for purely non-business purposes, but at the end of the day, many people are actually paying for advertising.
Advertising should not be viewed as a “loophole” to get around the new laws. Taxpayers need to ask themselves what they are paying for and then classify as such. It is the same as the IRS would do in reviewing the deductibility of an expense. Any time it is not clear, or if these new rules have caused added costs to the way you do business, you should discuss with your tax professional if you are properly classifying your expense and properly applying the rules.