The Internal Revenue Service has released an important regulation to update the rules regarding meal and entertainment deductions. Under previous guidance meals during entertainment events could not be deducted, however the IRS clarified that all business related meals, even those provided during entertainment events are at least partially deductible. See our meal and entertainment guide below or available here.
The Tax Cuts and Jobs Act (TCJA) has recently made changes to the deductibility of entertainment expenses and business meals which limits “perks” used in the industry.
Prior Law: 50 percent of business related expenses for meals and entertainment were deductible.
Current Law: Entertainment expenses, even if they are directly related to or associated with substantial business discussions, are no longer deductible. This means tickets to sporting events (including donations for rights to college sports tickets), theatre tickets, and skyboxes or suites used for entertainment events can no longer be deducted. In February 2020, the IRS clarified that meals during entertainment events can be deducted as a separate receipt.
Additionally, membership dues to social and business clubs are no longer deductible. However, trade association dues were not affected by the TCJA and remain tax deductible.
Business meals, including meals while traveling, are still eligible to receive the 50 percent deduction, provided the meal is not “lavish or extravagant” according to the IRS.
Expenses for holiday parties or similar recreational/social activities for employees are still 100% deductible.
What this means for the industry: The TCJA reduced taxes for businesses in exchange for eliminating the deduction for these incentives. Each company will need to evaluate the costs and benefits of continuing incentive trips without the deduction for 50 percent of the cost of the entertainment.
Additionally, companies can look at alternative methods to attract customers utilizing existing tax deductions. The 50 percent deduction for business meals may still be used for business development. Marketing costs can also still be deducted; however, any event must include marketing from start to finish. A small business pitch at the beginning will not suffice.
The changes included in the TCJA altered the way the industry may utilize customer incentives. It is likely we will see new and creative ways to provide customer incentives. We will keep you updated as IRS guidance and tax court rulings develop.