In an effort to offset revenue lost under the new Tax Cuts and Jobs Act (TCJA), several popular business expenses are now subject to deductibility limits or were eliminated entirely. One such benefit that was eliminated was the deduction for entertainment expenses.
Under pre-TCJA law, a 50% tax deduction was allowed for entertainment, amusement, or recreation expenses that were directly related to the active conduct of a trade or business, so long as the business had proper documentation and could prove the expense was ordinary and necessary. The Tax Cuts and Jobs Act has repealed this rule and disallowed the deduction, regardless if the expenses are directly related to or associated with an active trade or business.
Historically, entertainment expenses were recorded on a business’s books under the expense account of ‘Meals and Entertainment,’ since both of these expenses were limited to a 50% deductibility for tax purposes. While entertainment expenses have been repealed, the new law maintains the deduction for business related meal expenses. Therefore, beginning in 2018, businesses should begin recording these expenses into two separate expense accounts. This will allow for easier distinction between business related meals, which are still 50% deductible, and entertainment expenses, which are non-deductible. This simple accounting change will allow business owners to better budget for these expenses, as well as improve upon year-end accounting and tax return preparation processing.
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