Tax Musings of a Burbank CPA: Tax Reform – Entertainment Deductions That Survived

(Thanks to  the Bradford Tax Institute for this Great Breakdown of Meals and Entertainment):

As you know from “Tax Reform Wipes Out 50 Percent Business Entertainment Deductions” yesterday, you may no longer deduct directly related or associated business entertainment. 
Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities. 
That’s the bad news. 
The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct:
*entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes; 
*expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
*expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent); 
*expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent); 
*expenses for goods, services, and facilities you or your business makes available to the general public; 
*expenses for entertainment goods, services, and facilities that you sell to customers; and

*expenses paid on behalf of non-employees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award. 


When you are considering using the survivors of tax reform’s entertainment cuts, you will find good strategies in the following:

Rent Home to Corporation Do you operate your business as an S or C corporation? If so, have you considered renting your home to your corporation for corporate meetings and perhaps the annual holiday party for employees? You should.

Why? If you do the rental right, the corporation pays you as an individual, it deducts the rent as a business expense, and you receive the rental income tax-free. See Tax-Free Income from Rental of Home to C or S Corporation. 

Employee Party Trip The government wants you to have happy employees. That’s why the tax code grants you extra deductions when you provide entertainment and entertainment facilities that primarily benefit rank-and-file employees. 

Employee Parties Lawmakers may not always make your life easy, but at least you know they want you to have fun every now and then. The tax code gives you a 100 percent deduction for the parties that you throw for your employees- as long as you invite the right kind of employees. 

Vacation Home as Entertainment Facility The entertainment facility rules are designed to destroy your entertainment facility deductions. But the law contains a number of exceptions. you learn how to use the business meeting and overnight lodging rules to make your vacation home a tax-deductible business asset. 

Employee Entertainment Facility Learn how employee use of your ski cabin or beach home produces a 100 percent business asset with deductions for depreciation, operating expenses, and mortgage interest.

This can make for a great fringe benefit for both the employees and you. It also can make a profitable investment.  

Entertainment Facility as Compensation to Users You have many ways to make your entertainment facility tax-deductible. For example, you can treat the use of the facility as compensation to the users. 

Under this rule, you give individuals either a W-2 or 1099 that includes the value of the compensation for their free use of your facility. If you give a W-2 or 1099 to a tax law-defined “specified individual” who uses your business beach home, ski lodge or other entertainment facilities, tax law limits your business’s deduction for its entertainment facilities. For compensated taxable use by non-specified individuals, the business faces no special limits on deductions for entertainment facilities.


Tax reform certainly changes some big chunks of the business landscape, including its extermination of the common and traditional directly related and associated entertainment deductions. But you have to say thank goodness for the survival of IRC Section 274(e) entertainment. You have many parts of this tax code section to like, especially if you have employees.

In this article, you hopefully found some nuggets that show you tax deduction strategies that you can use after tax reform.


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