One of the material changes made to the tax code resultant of the 2018 tax reform is that the business entertainment deduction has been suspended until 2026. It’s not just large enterprises that are affected by this law, but also small businesses, freelancers, solopreneurs, and other self-employed individuals who may now be changing their plans and budgets depending on how integral this deduction was to their operations. While company funds can still be used to cover these expenses, they are just no longer deductible.
Since the tax code intends to influence behavior, the significant overhaul to the business entertainment deduction could spell some interesting outcomes for business decision-making. Here’s a detailed explanation of how the law changed and what behavioral shifts could ensue.
Offsite Entertainment No Longer Deductible
If you’re taking a prospect or client out to a ball game, concert, or other event it’s unfortunately not deductible anymore. The same also goes for other offsite entertainment such as facility rental for parties and other activities deemed primarily for recreation. It also applies to memberships and season tickets at recreational facilities. This provision has small business owners, freelancers, and their advocates worried since the elimination of tax savings on these expenses will hurt them. They rely on these events to develop closer relationships with prospects and clients given that fully-deductible traditional advertising is more effective for established and/or larger businesses.
A possible work-around for entrepreneurial types is to host parties that have more promotional than recreational elements present. Events purely for marketing purposes, like getting a booth at a trade show, are still fully deductible. If your business hosts a party that prominently features your branding and has some kind of presentation or professional networking aspects that are front and center with the recreational portion being more incidental, you may be able to work around the death of the business entertainment deduction.
The Meals Deduction Remains
There is currently a lot of confusion regarding business meals in light of this law change. Entertaining clients by taking them out for a meal or just brainstorming over a cup of coffee is still deductible, as are meal expenses for eligible business travel. Both are still subject to the 50% limit with the only exception being for meals that are a significant part of your line of work such as a chef or food blogger. But if you’re taking your client out to dinner and a show, only the dinner portion is deductible.
Then for businesses that have employees and a physical workplace, the provisions for providing meals to employees aren’t as generous as they were. Prior to 2018, employers could deduct 100% of the cost of meals furnished to employees as a de minimis benefit. This means that the meals were provided for the employer’s convenience, such as giving employees free dinner for working late using a corporate meal delivery account, to get de minimis treatment. The deduction remains but is now subject to a 50% limit just like the standard business meals and entertainment deductions have been for most taxpayers. However, after 2025, de minimis benefits for employer-provided meals intended for their convenience will no longer be deductible.
This law change is probably not going to make most employers immediately stop making employees work later or stay on the premises during lunch break. But for Silicon Valley type environments where lavish cafeterias are a major draw for talent, it could definitely give these employees less incentive to work later or stay on the premises for lunch if employers stop providing them meals. A healthier work-life balance could result over time if there’s no incentive for employers to provide this benefit and employees need to pay out of pocket for meals now.
Office Holiday Parties and Entertainment on the Premises
This is the only type of entertainment that survived the 2018 tax reform. Whether you’re a Fortune 100 company or solopreneur holding a party for your clients and colleagues, entertainment off the premises is no longer deductible. But if you’re hosting a party for your employees at the workplace, it’s actually 100% deductible. The party doesn’t need to specifically be for holidays: it can be for retirement, birthdays, celebrating a strong sales quarter, or making new hires feel welcome. But in order to be deductible, the party needs to be held at the workplace and not offsite like a restaurant or other external venue.
Because this is the only surviving portion of the business entertainment deduction, employee morale could face a downturn if they feel like they never get to leave the workplace. However, event planners and other party professionals may also see a budding opportunity in making parties come to the workplace instead of hosting corporate events at the venues they’re affiliated with. With the reduction of the corporate meals deduction for employees and the entertainment deduction otherwise being eliminated, office parties being the only deductible form of entertainment will affect corporate catering budgets. With less incentive to provide meals on the premises or arrange for offsite parties at restaurants, budgets are likely to be cut. But given that the deduction for parties intended for employees at the workplace is also not limited to 50% of the costs, there’s definitely more incentive to go all out for office parties now with the best food, decor, and entertainment although this definitely leaves out smaller employers who lack the proper facilities for this type of hosting.
Given the costly audits and frequent misuse and abuse of the meals and entertainment deductions, it makes sense that Congress culled it as a cost savings measure. Not all of the behaviors associated with the business entertainment and meals deductions are necessarily going to go away overnight given how conducive they are to business. But one can expect to see entertainment budgets reduced and some events canceled or modified.