Congress Eliminates Tax Deduction for Business Entertainment Expenses

By: Lauren Surdyke

The days of closing a deal over a round of golf may not be over, but doing so is about to get much more expensive. In the “Tax Cuts and Jobs Act,” signed into law December 22, 2017, Congress disallows a tax deduction that has previously permitted business taxpayers to partially deduct entertainment expenses, such as taking a client out to a baseball game, as long as there was a discussion about business. While this won’t stop businesses from using entertainment to establish goodwill with clients, it may force them to evaluate the costs.

Prior to December 31, 2017, the law allowed businesses to deduct certain entertainment, amusement, or recreation expenses, provided the activities were business-related. In most cases, businesses were limited to a total deduction of 50% of the expense. This deduction has been widely used by companies in nearly every industry.

Effective January 1, 2018, the “Tax Cuts and Jobs Act” eliminates the business deduction for entertainment, amusement, or recreation, even if it directly relates to the activities of the business.

Many companies may be forced to crack down on entertainment expenses that serve a valuable purpose in business generation and client maintenance, such as conducting contract negotiations before taking a client to a hockey game or sending a prospective client tickets to the theatre. Small businesses may be less equipped to “woo” their clients in light of the disallowed deduction, making it harder for them to compete with larger firms.

This change is not permanent, however. The provision disallowing the deduction for entertainment expenses expires on December 31, 2025. In the absence of further legislation, the old law allowing businesses to partially deduct entertainment expenses will then be resurrected. In addition, some are already seeking ways to provide an allowable deduction for entertainment expenses, such as possibly re-framing some entertainment activities as deductible marketing expenses. It will take the Internal Revenue Service some time before writing regulations to implement these new tax laws, so whether this is a permissible framing of the deduction remains to be seen.

Businesses must familiarize themselves with the new tax laws and act with awareness of tax and other legal consequences. Contact an attorney at Paule, Camazine & Blumenthal, P.C. today to discuss the impact the new tax law will have on your business.

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