It’s no secret that many a sale has been closed over a three-martini lunch. Client entertainment is a given in most industries and most salespeople carry a company credit card for just such transactions.
It’s also no secret that more than a little commingling goes on between personal entertainment expenditures and those that qualify as business expenditures. That is no longer an issue; at least for now. Here’s why….
Under the new tax reform, the veil separating business expenses and pleasure has come crashing down with the elimination of entertainment deductions.
Not good news for business owners who counted on this deduction to defray tax bills at the end of the year. Even the limited deduction of 50% is no longer valid for dinners or cocktails with prospective clients or service providers and similar entertainment expenses.
What could be worse?
Well, how about this: sales related entertaining such as:
- Sporting events—nixed,
- Boating and Golfing—nixed.
- Theater and other shows, box seats at stadiums—yes, those too.
What Does This Mean for Tax Planners?
Will they still be able to work their magic? Their expertise as tax planners is founded in creative workarounds and alternatives. The old saying, when one door closes, another opens applies in the tax world too.
What are The Options?
Well, there’s always Internal Revenue Code Section 274(e).
Despite reforming entertainment-related expenses, this will allow some expenses to be deducted, albeit under different circumstances.
For instance, if you pay for the use of club seating or a private box at a stadium, using this as compensation for your employees will still allow this expense to be deductible.
You need to meet two criteria to make this shift:
- Ensure your employees attend these events.
- Include the value of each event as taxable wages.
The “downside” for your team is additional tax that will be subject to withholding and is included on their form W-2.
The “upside” is it will ensure you can still deduct the expense.
Are Business Meetings Still Covered?
Brace yourself for the GOOD NEWS … YES!
As always, events and entertainment expenses related to business meetings including board of directors and employee meetings continue to be deductible. Deductible expenses continue to include meals and beverages, subject to the 50% limitation, facility rental, décor, supplies, and ancillary costs.
Is There Any Other Way to Deduct Entertainment Expenses?
Again, yes. You can still provide entertainment to the public, your clients, or prospective customers by issuing an information tax statement to the recipient. The most common form to use would be the form 1099-Misc. The recipient will need to include it as income and it will be taxable, but your business will still benefit from the deduction.
Let’s get more creative.
You might consider charging for the event or experience. Sure the income will be taxable, but the cost of the activity will become deductible, transforming your expense from after tax to pre-tax dollars.
The new tax reform brings big changes but your tax planner will still be able to work with you and provide valuable advice. To find out more about how to navigate the tax laws both new and old, be sure to work with someone who is certified in tax planning. We’ll help you find the new ways to open doors to a lower tax bill!