Separate Meal and Entertainment Expenses in Your Business Records

March 12, 2019
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Recent tax reform requires you to make changes to your company’s accounting. The Tax Cuts and Jobs Act (TCJA) that was passed in December 2017 and takes effect this year has created more headlines that you can count. You’ve probably heard about reduced tax rates, an increase in the standard deduction and possibly even a qualified business income deduction for pass-through entities. However, there is one change that hasn’t been covered as much yet requires you to update your accounting processes.

Good-bye business entertainment expenses

If your business, like most, has a meals and entertainment category in your accounting system, these now need to be separate categories. Until January 1 of this year, you were able to deduct 50 percent of both your meal and entertainment expenses. The TCJA eliminates the deduction for client entertainment, including tickets to charitable events, while keeping the deduction for meals. In the case where a meal is accompanied by entertainment (think dinner at the ballpark), then the meal must be purchased separately or listed separately on a receipt or it is not deductible.

To qualify for the meal deduction, the meal must be provided to a current or potential customer, consultant or similar business contact and an employee from your company must be present. The expense cannot be extravagant for the circumstances either.

Companies cannot try to circumvent the client entertainment disallowance by inflating the cost of food and beverage either. The IRS has specifically stated this is not acceptable.

Other meals have different tax treatments

The good news is that your holiday partings and company outings are still 100 percent deductible. However, those meals you provide your employees for your benefit (think employee meeting) are no longer completely deductible. They are only 50 percent deductible and, if the government doesn’t make any additional changes before 2025, they will become nondeductible at that point in time. This does not apply to employee travel meals that continue to be 50 percent deductible.

Change your accounting system

Prior to now it was not necessary to separate out entertainment from meals, and many companies have a single budget category for both. In order for you to properly account for the deductibility of these expenses today, start by looking at your general ledger. You should now have separate categories for pure entertainment expenses, meals and holiday parties. You also need to be able to pull out the deductible meal amount from receipts that also contain entertainment expenses.

You also want to make sure any expense report forms require the business purpose and business relationship of these meetings with a breakout of the amount that relates to food and entertainment separately.

If you take the time to make the changes now, it will be easier come year end to capture the amounts needed for your 2019 tax return. If you have questions or need help setting up these accounts, please contact us.