New Tax Law Impacts Entertainment Expenses

The recently passed Tax Cuts and Jobs Act of 2017 has changed the deductibility of entertainment expenses such that businesses may wish to change the way they classify and aggregate expenses to facilitate the preparation of future tax returns.   

An easy way to analyze the change is to compare the old law to the new law.

Old Law through December 31, 2017

No deduction was allowed with respect to:

  • An activity generally considered to be entertainment, amusement or recreation, (collectively referred to as entertainment) unless the taxpayer established that the expenditure was directly related to the active conduct of the taxpayer’s trade or business, or
  • A facility used in connection with such an activity. 

    If the taxpayer established that the entertainment expense was directly related to the active conduct of the taxpayer’s trade or business, the deduction was generally limited to 50 percent of the amount otherwise deductible.

    In addition, no deduction was allowed for membership dues with respect to any club organized for business, pleasure, recreation or other social purpose.

New Law starting January 1, 2018

No deduction will be allowed with respect to:

  1. An activity generally considered to be entertainment, amusement or recreation, (collectively referred to as entertainment), or
  2. A facility used in connection with such an activity. 

In addition, no deduction will be allowed for membership dues with respect to any club organized for business, pleasure, recreation or other social purpose.

As you can see, the change is simple and straight forward, entertainment expenses will no longer be deductible. Period. 

Accordingly, businesses should consider setting up separate general ledger expense accounts for business meals (still 50% deductible) and entertainment expenses (now 100% non-deductible)

This is also an opportune time to reflect on the different types of club dues that are deductible versus non-deductible.

Examples of clubs whose dues are non-deductible include:

  • Country clubs
  • Golf and athletic clubs
  • Hotel clubs
  • Sporting clubs
  • Airline clubs
  • Clubs operated to provide meals under circumstances generally considered to be conducive to business discussions.

The following are examples of clubs that are not considered organized for business, pleasure, recreation or other social purposes and accordingly, their dues are deductible:

  • Boards of trade
  • Business leagues
  • Chambers of commerce
  • Civic or public organizations
  • Professional organizations such as bar associations and medical associations
  • Real estate boards
  • Trade associations