Lawmakers finally did it. First, they reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. In 1993, they reduced that 80 percent to 50 percent.
And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.
For example, during 2017 you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, providing you passed some tax law tests on business discussion and associated entertainment.
Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has as its mission the generation of business income or other specific business benefit.
The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.
Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer deductible:
• Business meals with clients or prospects*
• Tickets to football, baseball, basketball, soccer, etc., games
AS A RESULT OF THIS CHANGE, IF YOU USE BUSINESS ENTERTAINMENT AS A BUSINESS-BUILDING TOOL, YOUR COST OF DOING BUSINESS OR GENERATING NEW BUSINESS HAS INCREASED.
This was a tax cut and tax reform bill, but what was not accomplished with this bill (unless you are someone who only gets W2 income and does not itemize deductions) is any form of simplification. In fact, there are several provisions in this bill that are quite difficult and cumbersome. Also, please remember since we are now in tax filing season, none of these changes affect your 2017 tax returns which we are getting ready to prepare for you.
This bill is extremely new, and we are constantly looking for guidance and interpretations on many of the changes that were made. If you have any questions now, we are happy to help you.
IN THE MEANTIME, PLEASE BE ON THE LOOKOUT FOR THESE TAX REFORM MEMOS. I WILL BE SENDING THEM OUT MORE FREQUENTLY ON SPECIFIC TOPICS SO YOU WILL HAVE INFORMATION TO HELP US PLAN FOR YOUR 2018 YEAR.
*There are still varying opinions on the ability to continue to deduct 50% of actual business meals with clients. Some have reviewed the new law and have determined that no business meals with parties outside of your organization are deductible now, others feel the meal portion would still be deductible, while the entertainment portion would not be. We will continue to monitor this and provide you with updates as we receive guidance from the IRS.