What meals, entertainment and business gifts are 100% deductible?
©2018, 2017 by Michael Gray, CPA
The deductibility for meals, entertainment and business gifts is a complex area of the federal tax laws that is worth studying. I am going to highlight some areas where these items are 100% deductible to stimulate further conversation with your tax advisor. This is not a complete explanation that you can rely on as authority for a tax position.
These rules were radically changed by the Tax Cuts and Jobs Act of 2017, effective for amounts paid or incurred after December 31, 2017 until December 31, 2025. The tax deduction for entertainment expenses has been repealed. These expenses include any item relating to (1) an activity generally considered to be entertainment, pleasure, or recreation; (2) membership dues with respect to any club organized for business, pleasure or other social purposes; or (3) a facility or any portion thereof used in connection with any of the above items.
Under the Act, no deduction will be allowed for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee's residence and place of employment.
The basic rule is that certain business meals are 50% deductible. Business gifts are deductible up to $25 to a person (spouses are counted as one person) per year.
Under the Act, food and beverages provided on the business premises of the employer for the convenience of the employer as a de minimus fringe benefit are only 50% tax deductible. Such amounts incurred and paid after December 31, 2025 will not be tax deductible. The "company cafeteria" exception has been repealed.
Under the Act, recreational or social expenses primarily for the benefit of employees other than highly compensated employees, such as company picnics and holiday parties, are no longer tax deductible.
There are important exceptions that should be separately accounted for on a business's books and records.
When a taxpayer is in the business of providing meals and entertainment to customers, such as amusement parks, restaurants and nightclubs, the expenses of providing those goods and services are 100% tax deductible. This is a form of providing "samples" as a promotional expense.
An important exception that I want to focus on is expenses for goods, services and facilities made available by the taxpayer to the general public. This article was inspired by private IRS letter ruling 9641005, which explains how the limitations apply for a casino. IRS private letter rulings can't be relied on as authority for tax positions, but indicate the thinking of the IRS for this situation.
In that ruling, the term "general public" is very broadly interpreted to include a customer or group of customers. (It may be that casinos as a group have enough political "pull" to get a generous interpretation by the IRS.)
Most of the gaming operations, shows, and restaurant facilities in the casino are providing meals, entertainment and lodging to the general public, and so the expenses of providing them are tax deductible as cost of goods and services sold.
Casinos provide a number of gifts to customers intended to stimulate additional business, called "comps."
When a casino provides food, drinks and show tickets on its premises as comps to guests who are gambling or lodging on the premises, they are providing tax deductible "samples" to the public, which are 100% tax deductible. (As I said above, the same rule applies when restaurants provide a complementary meal at their premises to their guests, restaurant critics, etc.)
Some promotional gifts given to customers may be fully tax deductible. An example from the Congressional Committee report is cited that if the owner of a hardware store advertises that tickets to a baseball game will be provided to the first 50 people who visit the store on a particular date, or who purchase an item from the store during a sale (gift with purchase), the total cost of the tickets is tax deductible as a business promotion expense. Casinos commonly give coupon books to their guests and may deduct 100% of the expenses for the coupon items.
Items, such as promotional pens, that cost up to $4.00 with the taxpayer's name imprinted for which multiple identical items are given are not considered to be business gifts, but simply fully tax-deductible promotional items.
Dinner meetings for groups of customers or prospective customers relating to a business presentation, as we commonly see for financial planners, are 100% tax deductible "public events." (Time will tell if the IRS changes its position in light of the Tax Cuts and Jobs Act of 2017. I believe this exception still applies.)
Things become more involved for comps provided by casinos for activities off their business premises.
For example, sporting event tickets (unless relating to a business promotion) are only deductible for their face value, and under the Act only deductible as gifts subject to the $25 annual limit per customer.
Meals or other entertainment provided off the premises might be 50% deductible if a representative of the casino accompanies the customer for a business deduction. Otherwise, reimbursements provided to the customer or direct payment by the casino aren't tax deductible.
Some business expenses that would otherwise be entertainment are classified differently in certain situations. For example, professional theater critics may fully deduct theater tickets for shows they review, and fashion shows by clothing manufacturers are fully deductible promotional events.
Note the $25 and $4 limitations above are very old, going back to 1954. This is a good time to write your representatives in Congress that these limitations should be increased or eliminated.
Now is a great time to review your accounting procedures with your tax advisor to assure you are maximizing your tax deductions. Your business should also segregate entertainment expenses from business meals on its books and records. If you need assistance in that effort, please call Thi Nguyen, CPA at 408-286-7400, extension 206.
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