Exploring meals and entertainment tax deductions

Joe Jalbert: Hello and thank you for tuning in today to Issues of Interest from Baker Newman Noyes, where we cover assurance, tax, business advisory and technology topics and trends affecting the banking and financial services industry.

I’m Joe Jalbert and I lead the banking and financial services practice here at BNN.

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Now let’s get into the episode.

Adam Aucoin: Hi everyone. Welcome to issues of BNN’s podcast for the banking and financial services industry. I’m Adam Aucoin, a tax principal here at Baker Newman Noyes and today I’m sitting down with Connor Smart, who is a tax senior manager at Baker Newman Noyes for a short episode on meals, entertainment deductions just before the holidays when we see a lot of this activity.

Hi Connor.

Connor Smart: Hey Adam, Good morning. Thanks for having me on again. It’s a pleasure to be here.

Adam Aucoin: Oh, thank you for taking the time. It’s a busy time of the year, and everyone’s got a lot of things they’re doing for work and personal. There’s lots of parties and dinner functions and celebrations and everything that goes around this time of year for the holidays and we figured that might be a good time to come back on this and talk about the taxability of these things because we’re CPAs, we like to go to these events and say, sorry, this event isn’t deductible or it’s 50% deductible because we Debbie Downers of the group.

So, we thought it’d be a good time of the year to go through it, something that’s out there. And you had actually just recently published an article on our website on this and we will have that link in our show notes. But we thought you might just come on, give our listeners a quick rundown on meals, entertainment and how that works.

Connor Smart: For sure and completely agree. It’s always fun to remind people of the tax treatment of whatever they happen to be doing at any family or social gathering that truly in these divided times will help bring us together, I think.

Adam Aucoin: Yeah, everyone loves it. It’s just like talking politics, right?

Connor Smart: Yeah, politics and tax. Always good to bring up at holiday dinners.

Yeah, for sure. Happy to help dive into this and like you said, we’ll have a more fleshed out article available on our website with some of the details but to just pull back a bit and where we’re coming from and to get to where we are Today, way back in 2017, which feels like a lifetime ago now under the Tax Cuts and Jobs Act, there were a lot of huge tax provisions in that piece of legislation that impacted all sorts of different tax matters.

And part of that was the meals and entertainment expense rules. And for the most part, the changes for the meals and entertainment expenses were meant to be pay for provisions.

In other words, they limited the amount of deduction that you could take as a business for meals and entertainment expenses. The idea being that it would cut down on some of those allowed deductions to help pay for the tax cuts and credits available elsewhere in the act.

And at the time when that happened, because many of those meals and entertainment expenses were so historically established, people were so used to them, we had thought that surely we will see some updates on these limitations, some changes on some of the sunset provisions, which I’ll briefly touch on for these types of expense changes.

And the reality is we didn’t see that happen since then. So basically, the TCJA Rules for the most part are still what governs the rules today. Where that matters is starting in 2025, there’s going to be a second round of phase outs for some of those limited meals and entertainment deductions.

So if you were to think of it in periods you have a pre Tax Cuts and Jobs Act, you had this interim period from 2017, 2018 until now, and then in 2025 a few more expense limitations are going to come into play.

So that’s the background in the environment of how we got to where we are now. We are talking about meals and entertainment together.

I think I actually want to start with entertainment expenses just because they are more limited than meals expenses overall. In many cases entertainment expenses are just disallowed in full. So, 100% of the costs of entertainment related expenses might be disallowed.

Adam Aucoin: That’s a good point. Jumping into this audience in particular might be upset to hear that they can’t deduct all their golf outings with their customers. But it’s good point because you’re right, it’s meant to be a pay for with the Tax Cuts and Jobs Act.

I know how many of these bankers golf. It’s something they think about and it’s a necessary business expense. But you don’t quite get the same bang for your buck because you’re not able to get a deduction for it.

It might be necessary, but it’s still even a little bit more costly than doing some other things.

Connor Smart: Yeah, that’s a really good point.

And that brings up a very distinct difference between where entertainment and meals go together. Because you might have business purpose meals, for example, lunch with a potential client, which still might be eligible for a certain amount of deduction.

But meanwhile, if the golf outing was your meeting or tickets to a sporting event or some sort of performance, that would be deemed entertainment, and it would be 100% disallowed.

There are very limited exceptions which can be deducted up to 50% expenses which directly relate to business meetings of the taxpayer in this case meaning the person claiming the deduction so of a business meeting with their employees, stockholders, agents, or directors.

So to callback to your golf example, if you were meeting with people, for example, a prospective client that was not in that limited group, then that would not be eligible for that 50% deduction.

And then the other 50% allowable, which is extremely limited, is related to meetings or conventions of 501 tax exempt organizations, which is obviously a very, very narrow window to fall into that.

If you have an event that’s an entertainment event that contains both an entertainment and meals component, technically you’re required to bifurcate those out. And so, you would have your meals expense, which would be deductible depending on the circumstances, and then the adjacent entertainment event, which would be disallowed in full.

So it does also create a certain amount of accounting and administrative due diligence and cost to be able to track that as well. To stay truly compliant with these different limitations, you would need to track and break those out separately in your books and records.

After entertainment, then like I said, we have meals expenses which are a little bit more complicated.

And I think the key takeaway we’d want to sit with these is that it’s very facts and circumstances specific to what you’re doing and what the purpose of the meal cost is.

Because meal expenses might be limited at 50%. So, you could deduct half the cost. You might be able to deduct all 100% of it in full. There’s this weird in between 80% bracket which exists, but it’s very rare in its use case.

And then starting in 2025, a certain subset of costs are going to go away entirely. And that’s actually what I think I’ll touch on here is what’s phasing out because all the other categories are things we’ve been used to for the past few years or even pre TCJA.

So at the start of the conversation, we mentioned these holiday company parties that are happening especially around Christmas and New Year’s. Right. So, company social functions that are available for the entire firm, they’re not just for your highly compensated employees, but for there for the general benefit of all employees.

Those before Tax Cuts and Jobs Acts through it and into the future, unless we have any changes that we can’t predict are still allowable to be deducted 100% in full.

Those are full deductible business expenses.

Business purpose meals, meanwhile, are still at the 50% limitation. It’s where they’ve been at for a while. You have that meeting with a prospective client, it’s got a clear business purpose.

You can deduct for taxable income purposes 50% of that cost. Costs going away fall into two categories. So, these are meals for the convenience of the employer and on premise food and beverage facility costs.

So previously you could offer employees meal and beverage expenses either for your convenience to help meet certain work requirements, or if you had an on-site cafeteria or facility to offer meals pre TCJA.

And until now those were also limited at 50%. But those two specific subcategories are carved out and in 2025 and ahead, unless this is rolled back or changed, those are actually going to be 100% disallowed as well.

So that’s definitely something to keep in.

Adam Aucoin: Mind and that’s something that we’ll keep an eye on. I think in our previous episode on this podcast, we had gone into a little bit of what does a second Trump administration look like in terms of tax policy changes, and really it’s a lot of wait and see. But we do expect some type of tax reform next year and those meal provisions may or may not be part of it.

So it’s a good thing to keep an eye on as we go forward because I do think we work with a number of financial institutions that have either an on-site cafeteria or they probably do some of the convenience of the employer meals deductions that we might have to start poking around at or maybe even create a different category because I think right now a lot of companies have a GL account for entertainment, a GL account for meals, and then we can kind of pull the right tax deductions from that.

You might need a third category of entertainment meals and then meals that are at the convenience of the employer kind of thing. So, we’ll have to keep thinking about that.

But I do think that could come up and it’s going to be bear watching over the next year to see where that goes. If it changes or if it’s we just let it go by the wayside.

Connor Smart: Yeah, I think that’s a really good point. And then you also have the compliance cost of trying to track what might be small dollars in your accounting records versus where is the benefit versus the cost of just disallowing it.

If you fall into that bucket where it’s a thin line. That’s what’s challenging with a lot of these costs is because you would think, well meals cost, that’s got to have a consistent treatment.

But it’s really so facts and circumstances to these specific functions. So that definitely could create an accounting challenge depending on how complex someone’s system of events are. And you make a good point on who knows how the tax code will be changed in the coming two to four years.

I haven’t specifically on this issue heard much about people raising it as a topic to be immediately addressed. We had thought when Tax Cuts and Jobs Act came out years ago, which included this sunset provision on those convenience of employer costs, that surely that was going to be amended and that sunset taken out and it never was.

So we’ll see if now that we are on the eve of that deduction going away, if it finally gets picked up as an 11th hour change or if it stays in and then we have another expense truly phase out.

Adam Aucoin: Yep. Wouldn’t surprise me to see that written in the margin at the very end. Again, so it’s a good point.

Connor Smart: So again, I think a lot of this stuff is going to be very facts and circumstances specific. I think a final takeaway, I might say in closing is to make sure your books and records are clear so you know what the source of your different expenses are by these different categories.

So we have on our website a couple articles now on this topic that can be used as a guidepost and obviously to our listeners and clients, please reach out to a trusted advisor for someone who you think can help guide you through this swamp of regulations and challenges so that you’re not surprised when it comes filing season and we have to dig those out and separate into the different tranches.

I think this is going to be one of those issues where the more upfront work and records you have, the easier it’s going to be when it comes to the tax treatment and filing time.

Adam Aucoin: Absolutely. All great points and I would encourage everybody to take a second to click on the link in the show notes to your article. It has a nice chart of some different examples and things to almost keep in your back pocket.

And certainly, we’re here to answer questions along the way. But this is all great. And again, we appreciate you coming on during a busy time of the year to cover these points and go over some things for our listeners and things to look out for.

Connor Smart: Much appreciated, Connor of course, it’s always my pleasure.

Adam Aucoin: Thank you everyone. And as always, we’re monitoring and sharing updates and developments, so stay tuned for more articles, podcasts and resources from our team. Thanks all. Goodbye.

Joe Jalbert: Thank you for listening to issues of interest from Baker Newman Noyes. The BNN Banking Team thrives on solving complex business challenges and helping institutions meet their goals.

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