As changes in the new tax law continue to evolve, we at MGA want to make sure you understand how specific changes may affect you and your business this year. A significant change you should be aware of is the elimination of the 50% deduction for business-related expenses for client meals and entertainment. In this blog, we explain the essential details of this change, as well as aspects still in need of clarification.
What are the tax changes, and how do they affect your business?
Changes in the tax law have put stricter limits on deductions for meals and entertainment, causing many business owners to rethink their best practices, especially regarding sporting events, golf outings, theater tickets, and other entertainment vehicles. Typically used to attract clients, these outings will become more costly for firms that choose to use them and more difficult for smaller firms to absorb the added cost, as they tend to operate within slimmer margins.
Not only does this change eliminate the deduction for client entertainment, but it also sets new limits on deductions for certain employee meals. The 50% deduction remains for client business meals that are not considered lavish or extravagant and where business is discussed. However, entertainment-related meals where business is not conducted — such as in cocktail lounges and theaters and at country clubs and sporting events — can no longer be deducted. The IRS is expected to provide further guidance in this area, as the guidelines mentioned above are open to loose interpretation.
An example of how the tax law change might affect you
Let’s say you would like to take your client on an out-of-town fishing trip to discuss business. Many business leaders feel that they can forge deeper relationships with clients and have their undivided attention outside of a conference room, hence the appeal of a trip.
In this scenario, your flights and hotel expenses would be classified as travel. Your meals would be classified as client business meals. However, your fishing guide and boat rental would be classified as entertainment and would therefore not be deductible.
Some wins for businesses along with some losses
Congress’s tax overhaul creates a number of tax cuts for businesses, which makes the loss of the entertainment deduction somewhat contradictory. For instance, the new tax law slashes the corporate rate from 35% to 21% and allows a 20% deduction for pass-through entities (in which profits are passed directly through the business to the owners and are taxed on the owners' individual income tax returns) but limits businesses’ ability to deduct certain expenses.
Though many of the details of the new tax law are still unclear, the changes were designed in part to help offset corporate tax cuts and simplify an area that some members of Congress felt was difficult for the IRS to enforce.
MGA has the experts and experience to help you act quickly
We understand that this new law still has many grey areas and we expect this confusion to continue until the IRS offers more guidance, probably sometime in July. In the meantime, we have been advising our clients to separate client meals from entertainment costs so that the two types of expenses are accounted for separately until further guidance is released.
As always, don’t hesitate to reach out to your team at MGA with any questions or concerns. In these uncertain times of changing tax laws, we are here to guide you and make the complex simple.