After December's tax code revision, businesses have been wondering if the deductions allowed related to client entertainment expenses had changed. Welcome clarity may be coming from the IRS soon, but tighter restrictions also could change how some companies interact with existing clients and how they try to win new business.
According to a report in The Wall Street Journal, the IRS is expected to release guidance soon explaining that companies still are allowed to deduct 50 percent of most client meal costs under the Tax Cuts and Jobs Act, the wide-ranging tax code revision signed into law in December 2017. However, costs for client entertainment like sporting events, which were also 50 percent deductible before TCJA, no longer can be deducted.
Tax professionals and corporate accountants asked the IRS to clarify language in the new law; the law could have been interpreted to be removing the long-standing 50 percent meal deduction allowance if the meals were categorized under client "entertainment." The IRS's forthcoming guidance is expected to preserve the 50 percent meal deduction while also detailing how meal expenses should be broken out from entertainment costs for tax accounting purposes, according to The Wall Street Journal, which cited sources familiar with the matter.
The end of the entertainment deduction may cause companies to lean more toward meals when interacting with existing clients or trying to woo new ones. Smaller companies, for whom tax deductions may make more difference to the bottom line, are especially likely to be affected, noted GoldSpring Consulting partner Will Tate. "Small or midsized firms will have to think more about whether [an entertainment event] is really worth the expense, so in more cases, they'll opt for client meals" over entertainment, he said.
But for the most part, the new deduction rules simply will change the numbers within the cost-benefit equation for any given client interaction rather than leading to wholesale policy revamps, especially when it comes to important clients and events, Tate predicted. "For a high-value client or event or when there's a large deal to be made, I'd imagine the tax deduction will be of secondary importance," he said. And for large companies, Tate noted, many client entertainment costs, such as the lease for a corporate suite at a baseball stadium, are paid ahead of time, so the marginal cost of each individual client interaction is relatively low.