Are Entertainment Expenses Tax-Deductible?

Posted by The Bean Team on 7/10/18 8:00 AM

Are Entertainment Expenses Tax Deductible?

3 MIN READ

Remember the good old days when you could take a client out for a round of golf and then deduct the expense from your tax bill? Well those days are now a thing of the past with a new tax law that mandates businesses can no longer write off most entertainment expenses.

The new tax law we’re talking about is, of course, the Tax Cuts and Jobs Act (TCJA), a law whose reputation precedes it. The gist? The TCJA eliminates deductions for entertainment, amusement, recreation expenses, and membership dues—pretty much all the fun stuff.

For the past three decades under the old tax code, 50% of entertainment expenses were deductible. But beginning in 2018 (and applicable to expenses incurred after December 31, 2017) under the TCJA, entertainment expenses are by and large no longer deductible at all.

Considering U.S. companies spend hundreds of millions annually entertaining prospective customers and clients, an expense that up until now could be partially deducted from their tax bill, this change comes as a harsh reality check for many businesses as they’re forced to take a hard look at their entertainment budgets. The cost-benefit analysis of developing relationships with clients and business partners has shifted and will likely alter how many businesses operate from now on.   

The new rules are more stringent and have many businesses bemoaning, “The party’s over!” 

So, are the days of wining and dining clients at sports games and concerts, or playing 18 holes of golf at the country club with a prospect, really over? Maybe. After all, floor seats to Lakers games can really add up…

But businesses will still find workarounds (don’t they always?). And some will of course continue to spend on entertainment without the tax incentive because the payoff in future revenue outweighs the cost of entertaining. But for those unwilling to push the boundaries of the tax code (for good reason, we should add) and without the budget to support frivolous spending on entertainment, there are some circumstances where entertainment expenses can still be deducted from your tax bill.

Promotional events, for example, can still be deducted as a marketing expense (time to ramp up the event branding!). And that annual holiday party and summer potluck are still fully deductible (phew).

Additionally, there are still some membership dues/fees that can be deducted under the new tax code, including those related to boards of trade, business leagues, chambers of commerce, civic or public service organizations, professional organizations (like bar associations), and trade associations.

But entertaining clients in any capacity, even if directly related to the active conduct of your business (and even if you close a highly lucrative deal over a weekend of play/business/play) will be fully at your expense. 

You shouldn’t beware the changes to entertainment tax deductions. After all, the elimination of these deductions will help pay for the reduction in business tax rates that has been championed as one of the biggest benefits of the TCJA. But you should be aware of these changes so there’s no major moment of surprise when you have to front the bill for those front-row tickets to that Beyoncé concert (hey, whatever it takes to secure a client, right?).  

Click here to contact the Bean Team! 

Tags: bookkeeping, Outsource, Outsourcing, Financial Planning, Financial Planning Firm, financial advisors, FA Bean Counters, entertainment expenses, taxes, tax prep, tcja, tax cuts and jobs act

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