Wondering if your upcoming company party is deductible? As we uncover the details associated with the Tax Cut and Jobs Act and apply the rules to the real-world activities in our trades and businesses we found conflicting messages associated with the deductibility of certain entertainment expenses. Our clients are asking us if they can deduct the expense associated with the company party.
For simplicity’s sake, we’ll narrow in on what the new tax law did change, which pertains to entertainment expenses associated with the active conduct of business. An example of “active conduct” of business would be hosting a client at a football game.
Entertainment expenses associated with the active conduct of business were 50% deductible. Under the above example, the cost of attending the event and meals purchased at the event were 50% deductible.
Entertainment expenses associated with the active conduct of business are not deductible. Under the above example, the cost of attending the event would not be deductible. Meals purchased at the event continue to be 50% deductible.
Under the prior law, there were exclusions (IRC §174(e)) to the limitation on entertainment expenses of which included recreational and social activities for the benefit of employees (see full list below). This exclusion allowed the cost associated with these activities to be 100% deductible. The new law kept these exclusions intact.
End result? Have fun at your company party as it continues to enjoy a 100% tax deduction.
The full list of IRC §274(e) exclusions from the limitation on entertainment expenses are as follows:
- Food and beverages furnished on business premise of the taxpayer for employees.*
- Goods, services and facilities that are treated as compensation to an employee on employer’s tax return as well as form W-2 for the employee.
- Expenses in connection with the performance of services for another person, under reimbursement or other expenses allowance arrangement, if the taxpayer accounts for the expenses to that person.
- Recreational, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees.
- Expenses incurred directly related to business meetings of employees, stockholders, agents or directors.
- Attendance at a business meeting or convention described in §501 which relates to business leagues and chambers of commerce.
- Goods and services provided to the public
- Entertainment expense sold to customers for adequate consideration.
- Expenses includible in income of persons who are not employees
*Food and beverages furnished at a company cafeteria is now limited to 50%, otherwise the above exclusions will continue to be 100% tax deductible.