On December 22, 2017, President Donald Trump signed the “Tax Cuts and Jobs Act” into law, marking one of the most dramatic transformations in the history of the modern tax code. Designed to spur investment and economic growth, the law is at the same time simple in concept and yet extremely complex in execution.
With that in mind, it is imperative for small business owners to become familiar with the law and its provisions as they impact both business and individual tax strategies. In this fourth article in our series on the new law, we’ll examine the impact of the tax law on a key area of importance to many businesses and their investments in market development and growth: business meals and entertainment.
The Role of Meals & Entertainment in Business and Tax Planning
Relationship building in business is as essential to growth as creating proposals and writing estimates. Creating a good experience and bonding with a business person, partner or prospect is one of the best ways to fuel growth and strengthen the business. That’s why many business owners and executives budget a significant portion of their annual marketing spend for entertainment as well as meals.
Prior to the enactment Tax Cuts & Jobs Act, the formulas for addressing the deductibility of meals and entertainment were relatively well understood and broadly accepted. However, with the advent of the new law came many dramatic changes to tax policy, and one of the biggest one for many businesses could be in this area.
Beginning on January 1, 2018, the cost of meals provided “for the convenience of the employer”, such as meals provided to employees who need to be available throughout the mealtime, are now 50% deductible. Previously, such meals were fully deductible as business expenses. In addition, the new law expands the definition of meals provided “for the convenience of the employer” to include those provide in an employer’s on-site dining location or operation, which is a significant change from prior policy.
Furthermore, beginning on January 1, 2026 (i.e., at the end of the 2025 tax year), the deduction of meals provided “for the convenience of the employer” will be dropped to zero (i.e. no deduction allowed). In addition, meals provided to employees traveling for business are still 50% deductible.
Under the new law, the rules for deducting business meals have been modified. Most accountants believe that businesses are still able to deduct 50% of the cost of a business meal when the meal is associated with the active conduct of the taxpayer’s trade or business (although this is currently being debated in the accounting profession, as we shall see below).
Meal & Entertainment Expenses as a Portion of Sponsorships & Charitable Donations
Under prior law, the portion of an event sponsorship agreement that was allocated to suites, box seats or game tickets, etc. was 50% deductible, whereas now that portion is not deductible at all (the remainder of the sponsorship value is deductible as an advertising expense).
Similarly, for charitable events (such as a charity golf classic), the value of the golf and meals portion of the donation is not deductible at all, and only the portion of the cost associated with the charitable contribution will be deductible. In the past, both components were fully deductible.
Summarizing the Impacts of the New Law on Business & Entertainment Expenses
In summary, the new law increases the number of expenses that are non-deductible, shifts some expenses from fully deductible to half-deductible (i.e. 50% deduction), and leaves very little in the category of fully deductible. Here is a summary:
Nondeductible Meal & Entertainment Expenses:
- Meals with business contacts that are part of an entertainment activity (such as a concert or game).
- Meals with business contacts during which there is not a substantive business discussion. **
- Entertainment expenses (including those involving prospects or customers).
- Entertainment facility costs (such as stadium or skybox fees)
- Membership fees for business clubs
- Membership fees for social clubs
- Membership fees for athletic or recreational clubs (i.e. golf/swim/tennis/etc. clubs)
50% Deductible Meal & Entertainment Expenses:
- Meals with business contacts during which there is a substantive business discussion. **
- Meals served on-site to employees for the convenience of the employer (until 1/1/26).
- Meal reimbursements for employees while traveling on company business.
100% Meal & Entertainment Expenses:
- Holiday parties or other celebrations for employees.
An Open Question: Are Any Business Meals Deductible Now?
Significantly, not all tax advisors agree that the allowability of a 50% deduction for business meals during which a “substantive business discussion” took place still exists. In other words, some have interpreted the new law as effectively eliminating any deduction for business meals.
This is because the Tax Cuts & Jobs Act removed an established series of requirements, first implemented under the Tax Reform Act of 1986. These requirements defined specifically what “substantive business discussion” entailed. Since the definition was removed, many accountants believe that this means that the distinction itself is gone, resulting in a ‘de facto’ policy that business meals are now nondeductible under all circumstances.
Under this interpretation, the only remaining meal deductions would be for employee meals during business travel (50% deductible), meals “for the convenience of the employer” (50% deductible), and office social and holiday celebrations for employees (100% deductible).
The accounting community is quite undecided on the question of which interpretation to apply for clients, so it is imperative to speak with your CPA about his understanding of the law and recommended method for staying in compliance while businesses await further guidance from the IRS in the coming months.
The highlights shared in this article are just a summary of key points in the law related to one aspect of business tax planning. Remember that the actual law itself is 1,097 pages in length, and contains numerous provisions and adjustments that could impact your small business, and you as a small business owner. Make sure to meet with your CPA or tax preparer proactively to review the impact of the new law in detail, and prepare to adjust and update your tax strategy accordingly.