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Business Expense Deductions Affected by New Tax Law

The business expense deduction tax rules related to meals and entertainment have changed, and left some uncertainty in the gap between the old law and the new.

Before the Tax Cuts and Jobs Act, the deduction allowed for entertainment expenses was limited to 50 percent of the amount otherwise deductible. Under the TCJA, the deduction for entertainment is completely repealed. Prior to the act, a 50 percent deduction was allowed for expenses related to business meals that were not lavish or extravagant. The confusion results from the issue of whether such business meals fall under the entertainment umbrella, or are still deductible.

“It now raises the question of what is an entertainment expense,” said Nathan Smith, director at the National Tax Office at Top 10 Firm CBIZ MHM. “Taxpayers have to be certain as to what falls under that category. It made no difference before, since there was a 50 percent deduction either way. Now, if it’s entertainment, it’s totally nondeductible.”

Until the IRS comes out with guidance in the area, the confusion will remain, according to Smith: “Some would argue that taking a client out for a meal clearly falls under entertainment. You could make a strong case for that by looking at the legislative notes for prior legislation, which suggest that meals are entertainment. On the other hand, the committee reports for the current law passed last December indicate they did not intend to change prior-law treatment for business meals. But the actual law that’s on the books doesn’t say this.”

“The consensus is that business meals are not caught under the entertainment umbrella and remain 50 percent deductible, which is what the committee report indicated, but it’s not the law,” he continued. “Nothing in the code says that meals are only entertainment and can be nothing else. The 50 percent deduction for business meals will likely remain, but we just don’t know for sure.”

To read the full article from Financial Planning, click here. Find a PDF highlighting some major modifications related to meals and entertainment at this link.