CWG Insight Series: Meals & Entertainment Deduction Changes
As the person responsible for managing my family’s finances and the financials of Tyler and I’s business, I am regularly reading and researching to ensure I’m making smart, strategic decisions. This knowledge is passed on to you through the advice and actions we manage on your behalf as your Personal CFO.
An important role that I play in our relationship is that of an educator. If I not only give advice but properly explain why we are or aren’t doing something, my hope is that you are more confident in the decisions we make together and that you are left empowered to make more strategic decisions in your business and personal lives.
In an effort to be more systematic with this education, we are going to begin writing a “CWG Insight Series” monthly article that will be emailed to all clients and be made available on our website (www.crownwealthgroup.com) and social media platforms (LinkedIn and Facebook).
While not all topics will fit your specific situation, my hope is that you find them useful and I encourage you to forward them along to family, friends and peers that might also find this type of information helpful.
So, with that, I’d like to dive into my first topic: the meals and entertainment tax deduction. As we’ve discussed in each of your quarterly reviews, the Tax Cuts and Jobs Act of 2017 is the single largest tax overhaul in the past 30 years. There are many positives, some negatives and a few things that are quite confusing. One topic that fits into all 3 of those categories is the meals and entertainment deduction for businesses.
At a high level, entertainment expenses are nondeductible, and most meals are 50% deductible. Previously entertainment expenses were 50% deductible and a broader array of meals had the potential to be 100% deductible. We anticipate this area of tax reform will be heavily scrutinized by the IRS so it’s important that your business properly tags these items if you experience these types of expenses in your business.
It’s mentioned above, but to be clear, you can no longer deduct any entertainment expenses. In the past you were able to deduct sporting event tickets, concert tickets, golf greens fees, etc. if they were incurred while conducting business with a client, prospect or other related business person. This is a major hit to businesses that entertain clients as a part of their service model and will likely cause a major decrease in this type of spending.
While you no longer get a deduction for these expenses, you should continue to report them as “Entertainment” on your P&L as this will allow you to properly track spending and profitability and the impact of that spending.
Fortunately, the meals expense, while modified, is still in effect and it’s important to understand the different categories and varying degrees of deductibility so that you are properly reporting these expenses on your P&L and tax returns.
Meals with client: For meals to be considered 50% deductible, business must be discussed during the meal and should be classified as: meals - client. If no business is discussed, the meal is not deductible for tax purposes and thus should be entered as: entertainment.
Meals with coworkers: Meals with employees/coworkers where business is discussed are considered 50% deductible and should be classified as: meals - coworkers. If no business is discussed the meal is not deductible for tax purposes and thus should be entered as: entertainment.
Meals while traveling: Meals when traveling for business are considered 50% deductible and should be classified as: meals - travel.
Celebratory meals: Company activities, such as holiday parties, birthday and anniversary celebrations, picnics, etc. are fully deductible. To capture the 100% deduction, these expenses should be classified as: meals – celebratory.
I have found that the easiest way to properly track these expenses is to set up the 4 meals categories listed above. It allows me to see exactly how I’m spending, which helps in my profitability analysis, and it makes it easier on the CPA come tax time.
As you begin to implement the proper tracking of these expenses in your business, please feel free to contact us for clarity around any specific situations that arise.
That’s all for now, until next month!
Nick
Required Disclosure: Crown Wealth Group does not provide tax advice, but will work with your tax advisor