November 5, 2018

2018 Taxes: Significant Changes to Business Deductions for Entertainment and Meals

If you are a business owner, the Tax Reform Act passed in December 2017 brought significant changes to tax deductions for business meals and entertainment.  Here's a summary of what's new for your 2018 taxes.

Business Entertainment and Business Meals:  Effective January 1, 2018, the new law eliminates the tax deduction for business expenses related to entertainment, amusement or recreation.  In other words, no business tax deduction for taking clients on a wine tasting tour or a round of golf.  No business tax deduction for renting a luxury box for clients at a baseball game.  As a business owner you can certainly continue to entertain clients, but the expenses you incur will not be tax deductible.

However, taxpayers can continue to deduct 50 percent of the cost of business meals ... if the taxpayer or an employee of the taxpayer is present and other conditions are met.  The meal must be for a 'bona fide' business reason.  The meals may be provided to a current or potential business customer, client, consultant or similar business contact, and substantial business discussions must be undertaken either immediately before, during, or immediately after the meal.  The expense may not be lavish or extravagant considering the circumstances.

Little has been said about these changes, particularly the loss of the entertainment business deduction.  The treatment of business-related meals was largely unchanged.  But, additional clarity - supplemented by a Notice of Guidance issued this year by the IRS - was given to specify what must occur for meals to be a business deduction.  The Notice of Guidance also stated the meals cannot be overly lavish or extravagant.

And About Those Free Meals Provided to High Tech Employees

Which brings me to the chef-prepared meals, sushi bars, yoga classes, laundry service, and similar fringe benefits - all free or highly subsidized to the workers - provided by some of the San Francisco Bay Area's High Tech companies.  Given the focus on valid Business Meal Deductions by both the 2017 Tax Reform Act and this year's IRS Notice of Guidance, I suspect we'll see an IRS audit crackdown on this very issue starting next year.  The money spent by large High Tech employers on these "free" fringe benefits - and almost certainly treated as a business expense tax deduction by them -  is huge.  By some estimates, Google alone spent over $72 million in 2017 providing free meals to its employees.  $72 million!  Extrapolate that number across other large High Tech employees that are providing the same free meals and other free fringe benefits, and you have a huge amount of taxes the IRS and State Taxing Authorities are missing out on.

Example of an Employee Free Lunch at Google:  Greek salad, pellie, (whatever in the heck that is!), melon-mint soup, seitan, watermelon-feta salad, green salad, toast, sparkling water, and more.  Dig in!
  I'll post again if new developments arise with this issue.

Tax Concerns?
About Mary Rae Fouts, EA

Mary Rae Fouts, EA provides tax, insurance consulting, and expert witness services to clients who have technical or complex concerns.  For more information about Mary and her professional services visit FoutsFinancialGroup.com.

Mary Rae Fouts

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