As of January 1, 2018, the Tax Cuts and Jobs Act completely disallows deductions for expenses incurred in relation to any activity “generally considered to be entertainment.” This decision reverses prior law allowing deductions for entertainment.
The IRS defines “entertainment” as any activity generally considered to constitute amusement or recreation, including membership dues paid to clubs organized for business, pleasure, or recreation, and payments for use of facilities in connection with any of the above.
Consequently, all forms of business entertainment including, but not limited to, golf outings, fishing, hunting, sporting events, theater and resort events, are entirely non-deductible going forward. This is true even if substantial and bona fide business discussions were associated with the activity. Such expenses remain non-deductible despite how your business may view and/or classify these expenses on your books e.g. marketing, public relations, advertising, or client development.
The law also provides that an objective test will be used to determine whether an activity is “of a type generally considered to constitute entertainment.” Ultimately, an expense will be considered an entertainment expense even if the taxpayer was not personally entertained by the event.
For example: A business owner, who despises baseball, treats a potential client to a Rockies game to discuss possible business opportunities and does not enjoy anything about the experience. This expense is still considered entertainment and non-deductible.
It is important to understand that the law pertaining to entertainment expenses is absolute. While we expect further clarification regarding the deductibility of certain meals under the new tax law, both the Treasury and the IRS have confirmed the 0% deductibility of all entertainment expenses.
As business owners, you will need to consider how the disallowance of deductions related to entertainment events, payments for use of related facilities, and club dues will alter your business expense policy. We further advise our clients to establish new general ledger accounts to properly account for and separate expenses according to their deductibility (e.g. fully deductible, 50% deductible, and non-deductible). At a minimum, if you use an expense account called “Meals & Entertainment,” we suggest that you separate this into two separate accounts. Properly identifying and recording such transactions throughout the year will help ensure efficient preparation of your taxes. Please talk to our office if you have any questions about classifying your expense accounts.