When owners, managers and salespeople attend trade shows, call on customers and evaluate suppliers, they may incur travel and entertainment expenses. Here are the rules for deducting these costs, including how they have changed under the Tax Cuts and Jobs Act (TCJA).
Keep detailed records
You must keep detailed records to substantiate any business expense. However, it is especially important for travel and entertainment expenses because they are considered IRS hot buttons. These records are likely to be scrutinized if you are audited by the IRS.
Detailed recordkeeping of expenses includes:
- The amount;
- The time and place; and
- The business purpose.
The IRS allows recordkeeping shortcuts under certain circumstances. For example, a business owner may opt to use the standard mileage rate, as established by the IRS for a given tax year, in lieu of substantiating actual auto expenses. In 2018, the standard mileage rate is 54.5 cents per mile for business travel. In addition, if you drive the same route consistently, you may be able to use an accurate record for part of the year to show your business mileage for the whole year.
Avoid potential pitfalls
When substantiating expenses, it is important to note the business relationship of any person entertained. Mixing business with pleasure can be risky. Consult with your tax advisor before claiming meals and entertainment expenses that are for both purposes in order to avoid raising a red flag with the IRS.
If you reimburse employees for meals, entertainment and travel expenses, make sure they are complying with all the rules. Additionally, enforce a policy that requires timely expense report submission. It is almost impossible to re-create expense logs at year end or to wait until the IRS sends a deficiency notice.
Learn about the new tax law
The rules for deducting meal and entertainment expenses have changed under the TCJA. Specifically, the new law disallows deductions for most business-related entertainment expenses paid or incurred after December 31, 2017, including the cost of facilities used to entertain customers.
Examples of nondeductible expenses under the TCJA include:
- Tickets to sporting events;
- License fees for stadium or arena seating rights;
- Private boxes at sporting events;
- Theater tickets;
- Golf club dues and greens fees;
- Company golf outings for customers; and
- Hunting, fishing and sailing outings.
Some business-related entertainment expenses may still be deductible, but only in very limited circumstances (such as when entertainment is presented at an event open to the public). While it was unclear at the time of this publication, it may be that taxpayers can still deduct 50% of food and beverage expenses incurred at entertainment events, but only if business was conducted during the event or shortly before or after.
It is also uncertain whether you can still deduct 50% of the cost of meals when business is conducted during the meal. At the time of publication, the IRS was expected to issue additional guidance on these questions. Contact your tax advisor for the latest information.
Related read: See “The Business Meal Expense Deduction Lives On Post-TCJA“ for additional guidance.
There is a silver lining: The new law still allows businesses to deduct 50% of the cost of meals for an owner or employee who is traveling away from home for business purposes.
Review policies and procedures
If you have not done so already, it is important to assess your company’s expense allowance policies to determine if the new TCJA provisions warrant changes — especially for entertainment expenses. Accounting system changes may be necessary to separately track entertainment expenses and business-related meal expenses, which might still be 50% deductible.