Q: Our agency handles some incentive trips for our corporate accounts. The corporations pay for their top customers' vacations in Las Vegas and other convention cities. We book the air and hotels, plan meetings and provide on-site staffing. Needless to say, this line of business has been very profitable for us. I have heard that the new tax law will affect meetings and incentive (M&I) business like this. Is that correct?A:
The Tax Cut and Jobs Act will undoubtedly adversely affect the entire M&I industry. Effective Jan. 1, business entertainment expenses for customers will no longer be tax deductible.
Since 1909, business entertainment expenses have been at least partly tax deductible. Starting with the Carter administration, only 50% of business meals and entertainment have been deductible to the corporation, unless it is "lavish or extravagant." Now, the other 50% has become nondeductible.
The IRS defines entertainment circularly as "any activity generally considered to provide entertainment, amusement or recreation and includes meals provided to a customer or client." So the meals and entertainment portions of incentive trips are no longer tax deductible to the corporate account.
The lack of tax deductibility could have an effect not only on the M&I business but also on hotels, restaurants, theaters and sports events. Convention locations such as Las Vegas could be profoundly affected.
Companies that take their best customers on annual trips will now have to think twice about whether to continue this practice. It could be tough for you to persuade the company that the business benefits of these trips outweigh the tax hit that they will take.
In addition to incentive trips, other kinds of customer entertainment that are now totally nondeductible are tickets to theater and sports events, golf outings and club dues if you entertain customers at the club. Everything that was subject to the 50% limitation is now totally nondeductible.
For corporations, the repeal of tax deductibility could be at least partially offset by the reduction in corporate tax rates and by new allowances for depreciation of equipment. As you probably know, the income tax rate for C corporations, which would include almost all the big companies in the travel industry, has been reduced from 35% to 21%.
The repeal of deductibility does not apply to meals that you provide to your own employees, but it does apply to most entertainment that you pay for. So, if you take your most productive staffers to Orlando, the airfares are probably fully deductible, the meals are 50% deductible and the Disney tickets are now nondeductible.
If your manager takes a prospective client to lunch and both of them order the same thing, the total bill is now 25% deductible, as you can deduct 50% for the manager's meal but nothing for the client's meal.
If you bring in pizza for your employees once per week or provide other meals in your office for your convenience, the expenses used to be 100% deductible. Under the new law, they are just 50% deductible until 2025, when the expense will be nondeductible.
One more thing: If you are a self-employed meetings planner or an independent contractor of any kind, your meetings-related meal expenses aren't subject to a 50% limit or the new law prohibiting deductions if the client reimburses you or gives you an allowance for these expenses in connection with services you perform and if you keep adequate records of these expenses for your customer or client.
Like all tax law issues, there are exceptions and complications, so be sure to consult a knowledgeable CPA or tax attorney if you have specific questions.