With entertainment expenses no longer deductible under the Tax Cuts & Jobs Act, the profitability of businesses and organizations in the entertainment industry may be significantly challenged as business owners reevaluate the cost/benefit of entertainment expenses.
Under the prior tax law, businesses could deduct 50% of entertainment expenses if the expenses were either ordinary and necessary in carrying on the trade or business or the expenses were directly related to or associated with the business. For example, taking a client out to a sporting event to discuss business.
Entertainment Expenses Under Tax Reform
Under the new law, there are no deductions for any of the following:
- Activities generally considered to be entertainment, amusement or recreation
- Membership dues to clubs organized for business, pleasure, recreation or social purposes
- A facility used in connection with any of the above activities
Business owners and management should conduct a cost/benefit analysis of the amount and type of activities in their entertainment budgets. Entertainment organizations (such as sports teams, orchestras and golf clubs) that rely on corporate clients may be affected by these reduced entertainment budgets. They should examine their value proposition and consider new methods to attract these corporate clients. Prompt action may be necessary to curb losses.
In the prior years, many businesses have tracked meals and entertainment together in their accounting system. Starting in 2018, these expenses should be tracked separately.
The IRS needs to issue regulations and guidance regarding the entertainment provisions as well as non-employee business meals. In the interim, a member of your Apple Growth Partners Healthy Growth team will be discussing planning opportunities with you.
The information contained in this article is current through the published date and may change when regulations and other guidance are issued. Content has been vetted by Apple Growth Partners’ internal tax reform team of licensed CPAs. For more information about this content, or any other matters related to tax reform, please contact your Apple Growth Partners advisor.