Deductibility and Accounting Related to Meals and Entertainment
By Kathi Koenig, CPA
The Tax Cuts and Jobs Act (TCJA) made several changes to deductions for meal and entertainment expenses. I went through these changes in my blog of January 2018, explaining that many of the expenses that were either 100% or 50% deductible were changed to being only 50% or not deductible at all. The biggest change was that entertainment expenses would no longer be deductible at all.
Since these expenses affect so many businesses and in the past, the expenses of meals and entertainment were lumped together in one expense account, I thought it would be a good time to remind you of the changes to the deductibility of meals and entertainment and give advice on how to record this activity during the year.
Creating new and separate general ledger accounts to categorize meals into the accounts that correlate with the different level of deductibility for tax purposes is a best practice for businesses. A few of the advantages of handling this way are below.
- It will take less time to categorize the activity as you go, then it will to go back through all of your activity for the year after you give the information to your CPA or tax preparer and they need to have it allocated.
- If you know what you need and look for it when it happens, you will be more likely to have the correct documentation when needed. For instance, meals that are provided with entertainment are still 50% deductible if the rules are followed. One of the rules is that it had to be separately stated on your bill to be deductible. If you discover months later that it was not separated, it may be too late to get it corrected.
- By allocating properly as you go, you are less likely to miss a deduction. In the example above, the deduction for the meals included in the entertainment could easily be missed if not separated out.
- If you are ever audited by the IRS, you will be in a much better position to defend your deductions. In every audit that I have been involved with, the IRS has always asked to see the detail related to meals and entertainment. If you have allocated to these various accounts, it will signal to the auditor that you keep more complete and accurate records which could be advantageous for the rest of the audit.
Below are the expense accounts I would suggest that you use to separate meals and entertainment expenses. Each account has a list of the type of activity that would be categorized to that account.
100% Deductible Meals and Entertainment-include these activities:
- Company events for employees such as picnics, holiday parties
- Meals and entertainment included in employee compensation
- Reimbursed expenses under an accountable plan
- Meals and entertainment available to the public or sold to customers
50% Deductible Meals and Entertainment-include these activities:
- Business travel meals
- Client/customer business meals
- Business meeting meals
- Meals provided for convenience of employer
- De minims food and beverages provided to employees
Nondeductible meals and entertainment-include these activities:
- Meals included with entertainment that is not separately stated
- Lavish or extravagant meals in relation to events
After creating these new accounts, it would be wise to revisit 2019 expenses and reallocate by each of these categories so you have it done for this tax year. Take some time to visit with your staff to be sure they understand the new accounts and what should and should not be included. You may want to include scenarios or better explanations so that it is easier for them to understand what it included.
This will help make your yearend smoother and could result in more deductions for your 2019 tax return. If you need assistance with the rules or have questions, we would be happy to discuss with you.
Kathi Koenig, CPA | Consultant and Former Shareholder