Working Hard, Playing Hard, and Claiming Deductions Appropriately

October 10, 2019

A tax reform changed the way businesses and individuals can claim deductions for meals and entertainment. Know the details so you can deduct appropriately.

Image of a table set with wine and water glasses.

Wine ‘em and dine ‘em.  Now, if I had a penny for every time I heard those words over the course of my sales career, I would have been able to retire early!  Without a doubt, entertaining clients is simply a part of many business relationships.  Furthermore, it could be done to the tune of a tax deduction! Therefore, it is common for companies to try to earn a prospect’s business by sharing a meal or a round of golf.

While the goal was for the engagement to end in a mutually beneficial relationship, there was an added benefit for the paying party.  Specifically, the savings from the meals and entertainment deductions.  This means the company that paid for the meal or entertainment could claim the engagement as a deduction when they filed their tax return.

However, a 2018 tax reform called the Tax Cuts and Jobs Act went into place, limiting deductions from that point forward.  Notably, the primary change is the distinction between meals and entertainment.

So, how does a company determine whether the deduction is for a meal or entertainment?   Also, is there a limit to how much can be claimed?  Well, the answers are here, and they are pretty simple.  Keep reading so that you can wine and dine confidently to your way to good deductions.

Q&A about M&E Deductions

Until recently, the law permitted businesses to deduct 50% of meals and entertainment (M&E) expenses.  Also, there were exceptions where 100% of the expenses were deductible.  However, that changed, when a 2018 tax reform eliminated the deduction in most cases.  Still, there are situations where the law allows M&E deductions.  So, here is a little Q&A to help you understand the new rules surrounding M&E deductions.

Q: Are business meals deductible?

A: Business meals are deductible under the following circumstances:  First, the meal is deductible if it is between a business and its employee(s), a client, or a prospect.  Second, the expense must come from a restaurant, and not an entertainment venue.  Third, the meal cannot be extravagant.  Finally, there must be a reasonable expectation that the meal will result in income generated for the business.  Therefore, if the event meets these circumstances, then the business meal qualifies for a deduction.

Q: Is a deduction allowed for food and beverages provided to employees?

A: In the case of company outings, business meetings, and events such as holiday parties serving food and beverages to employees, these events are eligible for the M&E deduction. 

Q: Which types of entertainment are deductible?

A: The recent reform has all but eliminated the deduction for entertainment.  Notably, the law defines entertainment as anything that falls under entertainment, recreation, or amusement.  Under the new law, there is no deduction for entertaining clients.  However, there are some cases where you may still take a deduction.  For example, you may deduct the cost of entertainment if you are entertaining employees.  In this case, you may take a full deduction.  Also, if you purchase entertainment to sell to customers there is no limit to the deduction you can take.

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Q: Is there any special consideration for nonprofit organizations?

A: Under the new law, nonprofit organizations can deduct the fees associated with business league meetings.

Q: What determines a 50% or 100% deduction?

A: The type of your business will determine if the deduction is partially or fully deductible.  For instance, if an expense is ordinary and necessary for performing income-generating work, then the deduction is fully deductible. 

To sum up these exceptions, if food, beverages, and entertainment are necessary for a business purpose, then they are allowed as a deduction.  So, if the M&E are not necessary for a business purpose, then you must read the fine print in order to make sure you are taking the proper deduction.  In other words, you will want to avoid taking a deduction for something that is not considered deductible. 

Giving Gifts and Receiving Deductions

Now, in all this discussion about meals and entertainment, there is another caveat we should discuss.  Indeed, the topic in question is gift giving.  Around the holidays each year, many businesses like to express gratitude to their clients.  So, it is common to send a gift basket, a box of chocolates, or some other token of appreciation.  While the intent is to be heartfelt, companies often justify the gesture by acknowledging that it is deductible.  However, you should know that gifts are not fully deductible in all cases.    

Here are the specifics about deducting the cost of gifts:

  • You can only deduct up to $25 of the cost of a gift (even if you spent more than that) to each person/entity.
  • The law considers spouses as one giving entity, even if filing separate returns.
  • If engraving, packaging, and/or shipping do not add substantial value to the gift, they cannot be included for a deduction.
  • When a gift costs $4 or less, you distribute the item on a regular basis, and the item has your business name permanently engraved on it, you may not deduct the cost of the item.
  • If the gift could fall under either the category of a gift or entertainment, it defaults to entertainment, and does not qualify for a deduction.
  • You must keep records to prove the business purpose of the gift, as well as the amount you spent to purchase the item.
Related:  IRS Asked to Reconsider

As you can see, giving gifts for business purposes is not as simple as picking out whatever you want and claiming a deduction for it.  You must make sure that your gift falls within these parameters, if you expect to be able to receive a deduction.

Wine, Dine, and Be Generous (to a Point)

In summary, building and maintaining deep business relationships is as important now as it always has been.  Clients want to feel your investment in them the same way they invest in you.  So, don’t quit wining and dining your clients just because the laws surrounding deductions has changed.  However, be sure to pay close attention to how and when you can claim a deduction.  If you are trying to make sure you receive a deduction for the amount you spend on clients, the devil is in the details.  In most cases, meals are still deductible to varying extents.  However, entertaining clients is mostly non-deductible.

On the other hand, the new law leaves plenty of room for you to treat your employees well.  Feeding and entertaining employees for special occasions is eligible for a deduction.  Considering this, remember that happy employees are dedicated employees.

Finally, be aware of the rules surrounding giving gifts and deductions.  The cost of gifts is not fully deductible in all cases, so keep this in mind as the holidays approach.   

All this to say, if you are seeking a deduction, you don’t need to completely change your ways.  You can still wine, dine, and be generous to your clients and employees to a point.  However, you will want to be aware of the new law as you do so.

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