First, lawmakers reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent. And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.
For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment.
Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or another specific business benefit.
The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.
Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer
deductible:
- Business meals with clients or prospects
- Golf, skiing, tennis, fishing, etc.
- Tickets to sports games—football, baseball, basketball, soccer, etc.
- Disneyland
Entertainment That Survived Tax Reform
As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018. Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.
That’s the bad news.
The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting
Under this section, you continue to deduct:
- entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
- expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
- expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
- expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
- expenses for goods, services, and facilities you or your business makes available to the general public;
- expenses for entertainment goods, services, and facilities that you sell to customers; and
- expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.
When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:
1. Renting your home to your corporation.
2. Taking your employees on an employee party trip.
3. Partying with your employees.
4. Making your vacation home a deductible entertainment facility.
5. Creating an employee entertainment facility.
6. Deducting the entertainment facility, because facility use creates compensation to users.
If you would like our help implementing any of the tax strategies above, please contact us. We will guide you thru the tax and accounting process.