One of the worst aspects of the changes to business deductions under tax reform, is the elimination of the entertainment deductions. This leaves many business owners examining their spending on these items to entertain customers, prospective clients, service providers and others. And if you are reading this for the first time – surprise! Even the prior limit of 50% is no longer deductible for these types of costs.
This is especially worrisome for sales related entertaining such as sporting events, boat trips, golfing, theater and other shows as well as box seats at stadiums.
As with any tax law, our expertise as tax planners lies in looking for workarounds and alternatives. The old saying, when one door closes, another opens applies in the tax world too. Despite reforming entertainment related expenses, we can still use Internal Revenue Code Section 274(e) which will allow some of the expenses to continue to be deducted, albeit under different circumstances.
Let’s say for example you pay for the use of club seating or a private box at a stadium, using this as compensation for your employees will still allow this expense to be deductible.
To make this shift, ensure your employees attend these events and include the value of each event as taxable wages. Yes, this will create additional tax for your team, and will be subject to withholding and is includable on their form W-2, but it will ensure you can still deduct the expense.
As always, events and entertainment expenses related to business meetings including board of directors and employee meetings continue to be deductible. Deductible expenses continue to include meals and beverages, subject to the 50% limitation, facility rental, decor, supplies, etc.
If you are still looking for ways to provide entertainment to the public, clients, or prospective customers, all you must do is issue an information tax statement to the recipient. The most common form to use would be the form 1099-Misc. It will be taxable and includable in the income of the recipient, but at least the business will still benefit from the deduction.
You might also consider selling tickets to the entertainment event or experience. Sure the income will be taxable, but the cost of the activity will become deductible transforming your expense from after tax to pre-tax dollars.
To find our more about how to navigate the tax laws both new and old, be sure to work with someone who is certified in tax planning. They’ll help you find the new ways to open doors to a lower tax bill!