Entertainment and Meals Expense After the Tax Cuts and Jobs Act of 2017

Entertainment and Meals Expense After the Tax Cuts and Jobs Act of 2017 PROGRAM KNOWLEDGE LEVEL Basic ADVANCE PREPARATION No advance preparation is required of the course participant.

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Entertainment and Meals Expense After the Tax Cuts and Jobs Act of 2017 Created and Presented by

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Tax Cuts and Jobs Act of 2017

Entertainment and Meals Expense After the Tax Cuts and Jobs Act of 2017

Introduction Overview ▪ For expenses paid or incurred after December 2017, the tax law has changed.

▪ Traditionally, meals and entertainment expenses have followed the same set of rules.

▪ For expenses after December 2017, meals are now treated differently from entertainment expenses.

Introduction Summary of New Rules â–Ş

Meal expenses with are limited to 50% unless an exception applies.

â–Ş

Entertainment expenses are now nondeductible for expenses paid after December 2017.

Deductibility of Entertainment Expenses

Definition “Entertainment” includes:

›

Any activity generally considered to provide entertainment, amusement, or recreation.

› Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families. ›

›

Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.

A taxpayer’s trade or business is considered in applying an objective test for what constitutes entertainment; e.g. theater tickets for a theater critic.

Old Rule Generally, a taxpayer could deduct 50% of the expenses to entertain a client, customer, or employee … …if the expenses have an adequate business connection by satisfying either…

▪ The “Directly-Related” test, or ▪ The “Associated” test

Directly Related Test An entertainment expense is directly related to a taxpayer's trade or business if the entertainment occurs either (1) during an active business discussion, or (2) in a clear business setting directly in furtherance of the taxpayer's trade or business ›

The taxpayer must have more than a general expectation of deriving a business benefit, other than goodwill, at some future time.

›

However, income or some other business benefit need not be shown to have actually resulted.

›

During the entertainment period, the taxpayer must actively engage in a business meeting or other bona fine business transaction.

›

This requires that the taxpayer or the taxpayer's representative be present.

Associated Test An entertainment expense satisfies the associated test if it is both (i) associated with the active conduct of the taxpayer's trade or business, and (ii) directly before or after a substantial and bona fide business discussion.

This allows a taxpayer to deduct entertainment costs where there is a clear business connection, but where no business actually is conducted during the entertainment.

Thus, goodwill entertainment that cannot qualify under the directlyrelated test may be deductible under the associated test.

New Rule ‥ Entertainment expenses are now nondeductible for expenses paid after December 2017. ‥ Facilities used in connection with entertainment and related membership dues (such as country club dues) are also nondeductible.

Examples of Nondeductible Entertainment

Entertainment Events › Generally, a taxpayer can't deduct any expense for an entertainment event. › This includes expenses for entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips.

Examples of Nondeductible Entertainment

Entertainment Facilities › A taxpayer can’t deduct any expense for the use of an entertainment facility. › An entertainment facility is any property a taxpayer own, rent, or use for entertainment. › This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection.

Examples of Nondeductible Entertainment

Club dues and membership fees A taxpayer can’t deduct dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or other social purposes.

Examples of Nondeductible Entertainment This rule applies to any membership organization if one of its principal purposes is either: • To conduct entertainment activities for members or their guests; or • To provide members or their guests with access to entertainment facilities, discussed later.

The purposes and activities of a club, not its name, will determine whether or not a taxpayer can deduct the dues.

Examples of Nondeductible Entertainment A taxpayer can’t deduct dues paid to: • Country clubs,

• Golf and athletic clubs, • Airline clubs,

• Hotel clubs, and • Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions.

Examples of Nondeductible Entertainment However, expenses incurred at a club, if related to an active trade or business, may be 50% deductible.

Example: An employer pays fees for membership at an area country club.

These are not deductible.

However, expenses spent inside the pro shop may be deductible if directly related to the taxpayer's business.

Examples of Nondeductible Entertainment

› Gift or entertainment. › Any item that might be considered either a gift or entertainment generally will be considered entertainment.

› However, if a taxpayer gives a customer packaged food or beverages that a taxpayer intends the customer to use at a later date, treat it as a gift.

Deduction may depend on the taxpayer’s type of business The taxpayer’s type of business may determine if a particular activity is considered entertainment.

For example, if a taxpayer is a dress designer and have a fashion show to introduce the taxpayer’s new designs to store buyers, the show generally isn’t considered entertainment.

This is because fashion shows are typical in the taxpayer’s business. But, if a taxpayer is an appliance distributor and hold a fashion show for the spouses of the taxpayer’s retailers, the show generally is considered entertainment.

Separating costs ✓ If a taxpayer has one expense that includes the costs of entertainment and other services (such as lodging or transportation), a taxpayer must allocate that expense between the cost of entertainment and the cost of other services. ✓ A taxpayer must have a reasonable basis for making this allocation. ✓ For example, a taxpayer must allocate the taxpayer’s expenses if a hotel includes entertainment in its lounge on the same bill with the taxpayer’s room charge.

Tickets to College Sporting Events For tax years before 2018, for any payment to an institution of higher learning that is allowable as a charitable deduction but for the fact that the taxpayer receives (directly or indirectly) the right to purchase tickets for seating at an athletic event, 80% of that charitable contribution is deductible.

For tax years beginning after 2017, no charitable deduction is allowed.

Interactive Exercise ▪ This Interactive Exercise is not a test - but rather is included to help you reinforce some of the important concepts covered in the last section.

▪ Have fun and see if you can pick the correct answer on your first try ▪ If you are taking this program for CPE Credit note the correct answer to each Interactive Exercise. You will be asked to provide that answer in order to obtain your CPE credit.

Interactive Exercise Which of the following is a correct statement?

A. The New Audit Rules do not apply to Partnerships with less than 100 partners.

B. The New Audit Rules cannot apply to any Partnership Return filed before January 1, 2018.

C. The New Audit Rules effectively replaced the three existing audit regimes applicable to partnerships (the TEFRA regime, the ELP regime and the small partnership regime outside of TEFRA) with two new procedures

Interactive Exercise A is Incorrect – Under the law prior to the enactment of the Tax Cuts and Jobs Act entertainment expenses were deductible if they met either the “directly related” test or the “associated” test.

Such expenses are now no longer deductible with limited exceptions.

Interactive Exercise B is Incorrect - – Under the law prior to the enactment of the Tax Cuts and Jobs Act entertainment expenses were deductible if they met either the “directly related” test or the “associated” test.

Such expenses are now no longer deductible with limited exceptions.

Interactive Exercise C is Correct – Such expenses are now no longer deductible with limited exceptions.

Deductibility of Meal Expenses

The 50% Limit In general, a taxpayer can deduct only 50% of the taxpayer’s business-related meal expenses, unless an exception applies.

The 50% limit applies to employees or their employers, and to self-employed persons (including independent contractors) or their clients, depending on whether the expenses are reimbursed.

When to Apply the 50% Limit The 50% limit will apply after determining the amount that would otherwise qualify for a deduction.

A taxpayer first has to determine the amount of meal expenses that would be deductible under the other rules discussed in this publication.

When to Apply the 50% Limit Taking turns paying for meals.

If a group of business acquaintances takes turns picking up each others' meal checks primarily for personal reasons, without regard to whether any business purposes are served, no member of the group can deduct any part of the expense.

When to Apply the 50% Limit Example 1. A taxpayer spend $200 (including tax and tip) for a business meal. If $110 of that amount isn’t allowable because it is lavish and extravagant, the remaining $90 is subject to the 50% limit. The taxpayer’s deduction can’t be more than $45 (50% (0.50) × $90).

Example 2. A taxpayer purchases two tickets to a concert for $200 for a taxpayer and the taxpayer’s client. The taxpayer’s deduction is zero because no deduction is allowed for entertainment expenses.

Amount subject to 50% limit

Amount subject to 50% limit If a taxpayer provides their employees with a per diem allowance that covers lodging, meals, and incidental expenses, a taxpayer must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages.

If the per diem allowance a taxpayer provide is less than the federal per diem rate for the area of travel, a taxpayer can treat 40% of the per diem allowance as the amount for food and beverages.

Other rules for meals and entertainment expenses

Ordinary and Necessary

Any allowed expense must be ordinary and necessary.

A necessary expense is one that is helpful and appropriate for the taxpayer’s business.

An expense doesn't have to be required to be ordinary and necessary.

An ordinary expense is one that is common and accepted in the taxpayer’s trade or business.

Not Extravagant › Expenses must not be lavish or extravagant. › An expense isn't considered lavish or extravagant if it is reasonable based on the facts and circumstances.

› Taxes and tips relating to a business meal are included as a cost of the meal and are subject to the 50% limit. › However, the cost of transportation to and from the meal is not treated as part of the cost and would not be subject to the limit.

Food and Beverage for Employees Classified as De Minimis Fringe > Old Rule - Food or beverage expenses that were excludable from the gross income of the recipient under ยง 132(e) are fully deductible. > New Rule - De minimis fringe meals are now 50% deductible and will be nondeductible after 2025 > Illustration: Coffee, water, and snacks provided by the employer on the premises

Food and Beverage for Employees for the Convenience of the Employer

Old Rule - The value of any meals furnished to an employee on behalf of the employer on the business premises were fully deductible.

Illustration: Meals provided by an employer for employees working overtime.

Meals provided at a company cafeteria or dining room.

New Rule Employee meals provided on behalf of the employer are now 50% deductible unless they qualify as a de minimis fringe benefit, as just above, or unless they are compensation to the taxpayer’s employees and will be nondeductible after 2025.

Employee Meals During Travel

Old Rule - Employee meals while away from home were 50% deductible.

New Rule- Unchanged. Still 50% deductible.

Illustration: An employee's meals that are ordinary and necessary expenses of traveling away from home.

Exceptions to the Rules 1 In general, entertainment expenses are nondeductible, unless on of the following exceptions applies:

Food and beverages for employee furnished on the business premises

5

Expenses of employees, stockholders, agents or directors business meetings

3

2 Entertainment treated as compensation

6

Expenses related to attending business meetings or conventions of certain exempt organizations

4 Reimbursed expenses

7

Expenses for goods, services, and facilities made available to the public

7. Expenses for goods, services, and facilities made available to the public.

Recreational Activity Expenses

8 Entertainment sold to customers

An employer's cost of running a company cafeteria or employee dining room on the employer's premises, including the cost of the meals served, is excepted from the entertainment disallowance rules.

This exception applies even if guests are occasionally served in the cafeteria or dining room.

1

Food and beverages for employee furnished on the business premises

Expenses deductible under this exception are subject to the 50% limit on meals

Examples:

1

Food and beverages for employee furnished on the business premises

Meals provided by an employer for employees working overtime

Meals provided at a company cafeteria or dining room

Note: Employee meals provided on behalf of the employer are now 50% deductible and will be nondeductible after 2025 .

2

Entertainment treated as compensation Entertainment treated as compensation on the taxpayer’s originally filed tax returns and treated as wages to the taxpayer’s employees or includible as compensation for services rendered by a non-employee; To gain the benefit of § 274(e)(9), the taxpayer must report the item on an information return.

2

Entertainment treated as compensation Example: If an employer rewards an employee and spouse with an expense-paid vacation, the employer can deduct the expense to the extent the employer treats the expense as compensation and wages.

Example: Entertaining a nonemployee or an individual working for the taxpayer as an independent contractor.

Note: Unchanged. Still fully deductible

3

Reimbursed Expenses Reimbursed expenses but only‌ ‌if the services relating to the expenses are performed for the employer and the taxpayer has not treated the expenses as wages subject to withholding; or ‌if the services are performed for a person other than the employer and the taxpayer incurring the reimbursed expenses accounts to that person.

3

Reimbursed Expenses This rule applies so long as the employer or client is subject to the entertainment disallowance rules. › This rule is the corollary to the employer exception for entertainment expenses treated as compensation, and it ensures that the entertainment disallowance rules apply at only one level. › The exception applies to an employee if the employer does not treat the entertainment expense as compensation.

3

Reimbursed Expenses

Example: A consulting firm agrees to charge a client fees plus expenses.

The consulting is fully reimbursed at the end of the engagement.

The reimbursed expenses are fully deductible to the consulting firm.

Note: Unchanged. Still fully deductible

4

Recreational Activity Expenses Recreational activity expenses for employees such as a holiday party or a summer picnic The exception does not apply if the recreational activities are provided in circumstances that discriminate in favor of highly compensated employee

Also; holiday parties, company swimming pools, baseball diamonds, bowling alleys, and golf courses.

Note: Unchanged. Still fully deductible

Expenses of employees’, 5 stockholders’, agents’, or directors’ business meetings Entertainment costs incurred by a taxpayer that are directly related to business meetings of his or her employees, stockholders, agents, or directors are not subject to the entertainment disallowance rules, except that any expenses for food and beverages are subject to the 50% deduction limitation.

The exception does not apply if there are so many distractions that there is little possibility of engaging in the active conduct of business Note: Unchanged. Still 50% deductible.

6 Expenses related to attending

business meetings or conventions of certain exempt organizations

Expenses related to attending business meetings or conventions of certain exempt organizations such as business leagues, chambers of commerce, professional associations, etc.

Example: An employer provides lunch for a meeting with a real estate board which is exempt under 501(a).

Note: Unchanged. Still 50% deductible.

7

8

Entertainment sold to customers Entertainment sold to customers; for example, if a taxpayer run a nightclub, the taxpayer’s expenses for the entertainment a taxpayer furnish to the taxpayer’s customers, such as a floor show, aren’t subject to the nondeductible rules.

This exception ensures that a taxpayer in the business of selling entertainment can deduct the costs of producing that entertainment

Example: The cost of producing night club entertainment (such as salaries paid to employees of night clubs and amounts paid to performers) for sale to customers or the cost of operating a pleasure cruise ship as a business will come within this exception.

Note: Unchanged. Still 100% deductible.

Interactive Exercise Which of the following does not correctly characterize the deductibility of meals expenses after the Tax Cuts and Jobs Act? A. In general, a taxpayer can deduct only 50% of the taxpayer’s business-related meal expenses, unless an exception applies.

B. Employee meals while away from home remain 50% deductible.

C. Recreational activity expenses for employees such as a holiday party or a summer picnic are no longer deductible.

Interactive Exercise A is Incorrect – After the Tax Cuts and Jobs Act a taxpayer can deduct only 50% of the taxpayer’s business-related meal expenses, unless an exception applies.

Interactive Exercise B is Incorrect – This is unchanged by the Tax Cuts and Jobs Act and remains 50% deductible. .

Interactive Exercise C is Correct – Recreational activity expenses for employees such as a holiday party or a summer picnic remain 100% deductible. This is unchanged is unchanged by the Tax Cuts and Jobs Act.

Substantiation Rules

IRC Sec. 274(d) ▪ IRC §274(d) prohibits the estimation of expenses, the taxpayer must “substantiate by adequate records or by sufficient evidence corroborating [his] own statement” all expenditures for travel, entertainment and meals in order to claim any deduction for these expenses.

▪ For this purpose, an “expenditure” is defined to include amounts paid or incurred for goods, services, and facilities, as well as any other items sought to be deducted, such as depreciation and losses.

Adequate Record Requirement Under IRC. Sec. 274(d) the taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer's own statement: › the amount of such expense or other item, › the time and place of the travel or the date and description of the gift, › the business purpose of the expense or other item, and › the business relationship to the taxpayer of the person receiving the benefit.

The End

COURSE EVALUATION Thank you for attending our program.

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Quizzer 1.

True or False – Traditionally, meals and entertainment expenses have followed the same set of rules; for expenses after December 2017, meals are now treated differently from entertainment expenses.

2.

True of False - Entertainment expenses are now nondeductible for expenses paid after December 2017.

3.

In addition to other requirements any allowed meals expenses must meet which of the following additional requirement to be deductible:

4.

a.

It must be ordinary and necessary.

b.

It must not be lavish and extravagant.

c.

It must be common and accepted in the taxpayer’s trade or business

d.

All of the above.

In general, entertainment expenses are nondeductible, unless a exceptions applies, which of the following is not one of those exception: a.

Food and beverages for employee furnished on the business premises

b.

Entertainment treated as compensation

c.

Unreimbursed expenses

d.

Expenses of employees’, stockholders’, agents’, or directors’ business meetings

5.

Under IRC. Sec. 274(d) the taxpayer must substantiate by adequate records or by sufficient evidence corroborating the taxpayer's own statement with all but one of the following: a.

The amount of such expense or other item,

b.

The time and place of the travel or the date and description of the gift,

c.

The business purpose of the expense or other item, and

d.

The tax identification number of the person receiving the benefit.