About those tax deductions

Before you write the check to reserve seats for your business' annual Cubs Rooftop Outing, or other client event, you may want to check with your tax advisor. In fact, if you haven't already done so, it may be time to rethink your entertainment strategy and budget for 2019.

One reason, of course, is the nearly inevitable annual price increase for practically any entertainment event. That's probably not much of a surprise.

But tax rules which actually became effective January 1 a year ago may be a bigger issue: Depending on the nature of your client entertainment activities, rules that initiated implementation of the federal Tax Cuts and Jobs Act of 2018 (TCJA) also are a reason that client entertainment costs may rise this year - and may have risen last year.

Here's why: The entertainment part of a client entertainment event is no longer tax deductible. In fact, according to advice in an October article written by Greg Dowell, managing partner at Dowell Group LLP, a Palatine-based CPA and advisory firm, the TCJA "eliminated any deduction for entertainment, amusement or recreation."

Tickets for your Rooftop Outing? Not deductible.

The hot dogs and burgers - food and beverages in tax language - that are part of the event? Deductible, up to 50 percent of the cost - assuming:

• The food-and-beverage expense is within reason and you, or an employee, are on hand when the food is served.

• Food and beverages are either purchased separately from the entertainment (tickets to the game, for example) or the cost is stated separately on an appropriate invoice.

The key, Dowell says, is to "keep the dollars properly segregated." (So you know, Dowell Group LLP handles both my business and household tax issues.)

Tickets to the game are not deductible. In the same sense, neither are fifth row center seats at the play your most important prospect wants to see, though cost of a meal before (or after) the theatre may be.

Because much of the IRS guidance that typically helps even top professionals understand new tax legislation came significantly later in the process than normal with the Tax Cuts and Jobs Act, it's conceivable that many business owners are first seeing effects as they hand off their papers to their tax preparer.

If there is good news in the still-new tax law, it is that business meals generally remain deductible under TCJA - at the ballpark, before theater or in the general course of business, with the caveat from Dowell that "It is not crystal clear in all cases when business meals provided to clients and business associates are deductible.

"Almost as important as qualifying for the (meals) deduction are the requirements for proving that the (expense) qualifies," Dowell wrote last month. "The use of reasonable estimates isn't sufficient to stand up to IRS challenge.

"You must be able to establish the amount spent, the time and place, the business purpose and the business relationship of the individuals involved."

You may want to check your accounting records for 2018 to make certain you properly segregated entertainment expenses (nondeductible) from business meals (50 percent deductible). With the filing date for many small businesses (S Corporations in particular) in mid-March, there's still time for a talk with your tax advisor. Maybe your tax preparer will buy lunch.

© 2019 Kendall Communications Inc. Follow Jim Kendall on LinkedIn and Twitter. Write him at Jim@kendallcom.com. Read Jim's Business Owners' Blog at www.kendallcom.com.