Tax Reform Destroys Entertainment Deductions for Businesses

First, lawmakers reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent.   And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.

For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment.

Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or another specific business benefit.

The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.

Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer
deductible:

  • Business meals with clients or prospects
  • Golf, skiing, tennis, fishing, etc.
  • Tickets to sports games—football, baseball, basketball, soccer, etc.
  • Disneyland

2020 Year-End Tax Strategies for Marriage, Kids, and Family

2020 Last-Minute Year-End Tax Strategies for Marriage, Kids, and FamilyIf you have children under the age of 18 and you file your business tax return as a proprietorship or partnership, you can find big savings in the work your children do for your business. And if...

Answers to Common Section 199A Questions

Answers to Common Section 199A Questions For most small businesses and the self-employed, the 20 percent tax deduction from new tax code Section 199A is the most valuable deduction to come out of the Tax Cuts and Jobs Act.The Section 199A tax deduction is complicated,...

Avoid Being an IRS Target When Your Business Loses Money

Avoid Being an IRS Target When Your Business Loses Money If you operate what you think is a business, but that business loses money, it may not be a business at all under the tax code. Such a money-losing activity can look like a tax shelter to the IRS, and that...

Avoiding the Kiddie Tax after Tax Reform

Avoiding the Kiddie Tax after Tax Reform If your family has trouble with the kiddie tax, you face some new wrinkles for tax years 2018 through 2025 thanks to the Tax Cuts and Jobs Act (TCJA) tax reform. This is one of the many areas where tax planning can pay off. For...

Be Alert to the TCJA Tax Reform Attack on IRA Recharacterizations

Be Alert to the TCJA Tax Reform Attack on IRA Recharacterizations When you convert your existing traditional IRA into a Roth IRA and then reverse the transaction by switching the account back to traditional IRA status, the reversal is called a recharacterization in...

Changes to Net Operating Losses After Tax Reform

Changes to Net Operating Losses After Tax Reform Tax reform made many good changes in the tax law for the small-business owner. But the changes to the net operating loss (NOL) deduction rules are not in the good-changes category. They are designed to hurt you and put...

Changes to Your Tax-Free Supper Money

The Tax Cuts and Jobs Act (TCJA) Changes to Your Tax-Free Supper Money Here’s how the TCJA applied its tax reform to your supper money meal allowances. Before tax reform, you deducted 100 percent of the supper money cost. Now, because of tax reform, your tax deduction...

Congress Reinstates Expired Tax Provisions

The big five tax breaks that most likely impact your
Form 1040

Defining “Real Estate Investor” and “Real Estate Dealer”

Defining “Real Estate Investor” and “Real Estate Dealer” The first good news is that you can be both real estate investor and real estate dealer with respect to your real estate portfolio. The next good news is that you are in control, and by knowing just a few rules...

Entertainment That Survived Tax Reform

As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018.  Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.

That’s the bad news.

The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting

Under this section, you continue to deduct:

  • entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
  • expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
  • expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
  • expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
  • expenses for goods, services, and facilities you or your business makes available to the general public;
  • expenses for entertainment goods, services, and facilities that you sell to customers; and
  • expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:

1. Renting your home to your corporation.
2. Taking your employees on an employee party trip.
3. Partying with your employees.
4. Making your vacation home a deductible entertainment facility.
5. Creating an employee entertainment facility.
6. Deducting the entertainment facility, because facility use creates compensation to users.

If you would like our help implementing any of the tax strategies above, please contact us. We will guide you thru the tax and accounting process.

6 + 1 =