It was common to combine expenses such as taking clients to a baseball game with dinner and paying for entertainment. These items are generally 50% deductible. This was changed by the Tax Cuts and Jobs Act.
While stand-alone business meals are still partially deductible for tax purposes, entertainment expenses cannot be deducted. It seems simple enough to separate entertainment and meals. But it can be quite complicated in real life. It becomes even more complicated when you add marketing expenses to the mix.
These are the basic rules to help you determine if marketing or meals costs can be deducted from entertainment and meals.
WHICH MEALS & ENTERTAINMENT EXPENSES NO LONGER DEDUCTIBLE
These are just a few examples of entertainment and meals that are now exempt from tax under the Tax Cuts and Jobs Act.
- Entertainment costs, such as tickets to a sporting event, concert or theater, round of golf, etc.
- These entertainment outings include meals
- Other recreational activities such as skiing or fishing that will entertain clients and develop new business relationships
Let’s say, for example, that an oral surgeon invites the dentist to Reno Aces to discuss forming referral partnerships. The game tickets are purchased by the oral surgeon. The cost of the tickets are not deductible as this is entertainment.
WHAT MEALS ARE DEDUCTIBLE
The 50% deduction for business meals is generally maintained at 50%. This applies to:
- Clients and business meals
- How much it costs to eat while on a business trip
- Take-out lunch with half of your employees
- For the employer’s convenience, business meals can be ordered at a company cafeteria or for staff who work late.
- Food and beverage expenses that are not deductible from an employee’s income (previously 100% deductible)
Note: Businesses can deduct 50% of business meals for the 2021- and 2022 tax years. This temporary deduction is intended to encourage the restaurant industry during its recovery from the COVID-19 pandemic.
Some business meals can still be 100% deductible. This includes:
- Employee social activities, such as holiday parties, company picnics and mentoring events, include:
- Events that are open to the public, where food and drinks are provided, like grand opening celebrations.
In February 2020, the IRS published proposed regulations to help taxpayers navigate through entertainment and meals deduction questions. These proposed regulations include a five-part test that will help business owners determine if a business meal qualifies for deduction. If:
This expense is an expense that is normal and necessary for business.
Under the circumstances, the meal is not extravagant or extravagant.
Either the business owner or an employee are present
Food and beverages must be served to current or potential business customers, clients, consultants, or other business contacts.
If food or drinks are provided at entertainment activities, they must be purchased separately. Also, the meal cost must be reasonable. Also, it is not possible to avoid entertainment deductions by increasing the cost of food and beverages.
Referring to the Reno Aces case, we can assume that the same facts apply except that both the dentist and the oral surgeon buy hot dogs and other drinks. Entertainment expenses do not include the cost of food and beverages. The oral surgeon can deduct 50% from the cost of food and beverages purchased at the event.
The luxury suite is for the orthodontist. The suite price includes both game tickets and buffet-style food, as well as beverages. The dentist gives all game tickets to the oral surgeon in a gesture of gratitude for their referrals. This allows them to invite family and friends. The game is not attended by the oral surgeon. The entertainment costs include the cost of food and beverages, so the expenses are not deductible. The oral surgeon or employee was absent.
WHAT DEDUCTIBLE MARKETING EXPENSES ARE?
Tax-deductible marketing expenses that help you attract new clients and retain existing customers continue to be allowed. These expenses can include:
- Advertising via search engines, social media, banner ads and newspapers. Direct mail campaigns are also available.
- Public relations and promotional expenses such as sponsorship of a team or promotional items, like mugs and t-shirts, are all examples.
- Printing materials like business cards, brochures and letterhead
Some marketing expenses cross the line between non-deductible entertainment and deductible meals.
Let’s look at some examples.
CUSTOM WINE LABELING WINE FOR A GIFT
Many business owners give wine bottles personalized with their logo and contact information. Labels are 100% deductible as marketing expenses. Be sure to keep track of both the wine and labels separately.
Another issue is the price of the wine. The IRS limits the amount that can be deducted for business gifts to $25 per recipient per year. This may not apply to bottles that are inexpensive. Your deductions will be less if you give higher-priced bottles.
HOSTING a “LUNCH and LEARN”
Many doctors host lunch and learnings, where they provide a meal and promote the services they offer potential patients or referral partners. The business pitch lasts for the duration of the event so you can claim the whole cost as a promotional event.
If you have a happy hour that is attended by staff and customers and the purpose of the event is more social than educational, then the 50% meal limit applies. Even if you only spend a few seconds promoting your company during the event, this applies.
SPONSORING A GOLF OUTING
Sponsor a golf tournament where guests are invited to play followed by lunch. Make sure that the food and beverage costs are separately invoiced. Golf costs are not deductible as entertainment. You can still take 50% off your meal expenses. You can also deduct any promotional items or customized signage that were given away at the event as marketing expenses.
We highly recommend that you eliminate the “Meals & Entertainment Expenses” account. Instead, you should create separate categories for meals that can be 100% deductible and meals that can be 50% deductible and non-deductible entertainment expenses as well as fully deductible marketing expenses.
Call Slate if you need assistance with your company’s financial accounting. We can help you account for marketing expenses and meals so that you get every tax deduction.