2018 Holiday Party Write-Offs
Before you know it the year-end holidays will be here. Already I received my first “save the date” for a company’s holiday party. That brings up an important point, how is the deductibility of Holiday Parties and Meals And Entertainment Expenses impacted by the Tax Cuts And Jobs Act Of 2017?
The Tax Cuts And Jobs Act Of 2017 (“TCJA”) was signed into law by President Trump on December 22, 2017. It has been a good 30 years since the last time the Internal Revenue Code received such a major update but for taxpayers who in the past looked to claim Holiday Parties and Meals And Entertainment Expenses as a tax deduction, you can say that starting in 2018 it is Uncle Sam who is the grinch this coming year-end festive season.
Major Changes From The TCJA Include:
Lower Income Tax Rates For Individuals.
Increased Standard Deduction For Individuals
Elimination Of Personal Exemptions
Limitations of Deductibility Of Itemized Deductions including Mortgage Interest and State & Local Taxes.
Lower Corporation Tax Rates.
Deductions Relating to Meal And Entertainment Expenses
Under prior law, a taxpayer generally can deduct business-related meal and entertainment expenses paid or incurred in entertaining a client, customer, or employee. The taxpayer had to show that the item was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business. In such case, a deduction is allowed, although it is generally limited to 50% of the expense amount.
Starting with 2018 more stringent rules apply with respect to a deduction for meal and entertainment expenses paid after 2017. The TCJA repeals the deduction for most entertainment expenses, effective for amounts incurred after 2017. There is no exception for amount incurred that are directly related to, or associated with, the active conduct of the taxpayer’s trade or business. This repeal would extend to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc. However, it is still possible that some amounts may still be deductible if they meet the exceptions in IRC Sec. 274(e), a provision that was not touched by the TCJA.
The main exceptions in IRC Sec. 274(e) allowing deductibility are:
- Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for the taxpayer’s employees.
- Expenses for recreational, social, or similar activities (and facilities used in connection therewith) primarily for the benefit of employees, other than highly-compensated employees.
- Expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors.
- Expenses directly related and necessary to attendance at a business meeting or convention of any certain organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade.
- Expenses for goods, services and facilities made available by the taxpayer to the general public.
Meals Consumed By Employees On Business Travel Or During The Workday.
Under prior law, an employer could deduct 100% of the cost of providing food and beverages to its employees through an eating facility that qualified as “de minimis” fringe benefits. Housing and meals provided to employees on the business premises for the convenience of the employer are excluded from income.
Under the TCJA, for amounts incurred and paid after December 31, 2017 and until December 31, 2025, an employer can deduct 50% of the cost of providing food and beverages to its employees through an eating facility that qualified as “de minimis” fringe benefits.
Business Meals With Clients.
Under prior law, a taxpayer had to show that the expense was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.
But what if the taxpayer takes a client out to lunch or dinner at a restaurant and conducts “a substantial and bona fide strategy discussion” at that lunch or dinner? The TCJA is not clear on the tax treatment of an expense typically described as a “business meal” where a taxpayer takes a client out to lunch or dinner at a restaurant and conducts “a substantial and bona fide strategy discussion”. The closest exception under 274(e) that could support deductibility is item 3 above, namely: “expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors”. It remains to be seen if IRS issues guidance as to whether this should be interpreted to include clients where at the business meal a substantial and bona fide strategy discussion takes place.
So what should be the tax treatment for holiday parties? Absent further guidance by IRS, for a taxpayer to be able to deduct amounts spent on holiday parties it comes down as to who is invited. If the party is open to the general public, it is deductible. If the party is open to all the employees of the taxpayer, it is deductible. But if not all the employees are invited or if employees are allowed to bring guests, you will not fall squarely within one of the exceptions of IRC Sec. 274(e) and deductibility is at stake.
What Should You Do?
Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS.
You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Inland Empire (Ontario) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.