The 2017 Tax Reform Law made some drastic cuts to entertainment expenses and many entertainment expenses are no longer deductible. Beginning with the 2018 tax year and going forward, here's what has changed:
What are Entertainment Expenses?
If it's entertainment, it's not deductible, Entertainment is a general term that the IRS says is "entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips, including such activity relating solely to the taxpayer or the taxpayer’s family."
"Entertainment" may also include costs for personal, living, or family needs of a business customer or their family. For example, this would include food and beverages, hotel, or car.
But entertainment doesn't include such items as
- A meal provided to an employee working overtime
- A hotel room paid for by the company for an employee's business trave
- A car used by an employee for business driving
These expenses are deductible business expenses, provided they meet IRS requirements.
What's Deductible/What's Not
Generally, the IRS doesn't allow business to deduct costs for activities generally considered entertainment, amusement, or recreation, or for a facility used in connection with such activity. Taking a client or customer to an "experience" is no longer deductible.
For example, a box at the ballpark, tickets to a concert, or a golf outing with clients is not deductible. Entertainment expenses for an employee who is traveling on company business are also not deductible.
But business meal costs are still deductible at 50%. So, a businessperson or salesperson can take a client to lunch to discuss business and the meal cost is still deductible.
If you can separate the cost of a meal at an entertainment event and the cost of the event and you have a separate receipt for the meal expense, you can deduct the meal cost at 50%. For example, if you buy tickets to a skybox a sporting event and have a catered meal at the event, you can deduct the meal but not the cost of the skybox.
Entertainment and Employees
You may deduct entertainment expenses that are compensation to the person, and are reported on Form W-2 for an employee or Form 1099-NEC for an independent contractor. Special deduction rules apply if the recipient is an officer, director, or other special types of business owners.
You may also deduct expenses for some types of events for the benefit of employees, except for highly compensated employees. For example, your company picnic or holiday party for employees can meet the test. A catered meal for employees at your office or elsewhere at your business location for the purpose of presenting employee awards would also probably be deductible as a business expense and it would be 100% deductible,
For employees traveling for business purposes, most of their expenses are deductible, including lodging and meals. But you can't deduct entertainment expenses for these employees.
An Example: If an employer gives a hotel room or an automobile to an employee who is on vacation, that would be considered as entertainment of the employee, and would not be deductible.
Entertainment Expenses vs. Advertising and Promotion Expenses
If your business entertains the general public for the purpose of advertising or promotion, this cost is fully deductible as a business expense.
For example, if a children's clothing store pays for the expense of hiring a clown at a community event, that might be considered promotion rather than entertainment.
For More Information
For more detailed information on entertainment expenses, see IRS Publication 463, Travel, Gift, and car Expenses and Publication 535 Business Expenses.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.