Tax Deduction Table Set for Company Picnics

While entertainment expense deductions are all but gone for small businesses, they may still write-off company picnics and similar outings. In fact, this write-off is exempt from the usual 50 percent limit on entertainment expense deductions.

Background: Prior to the TCJA, you could deduct 50 percent of the cost of entertainment that was “directly related” to “associated with” your business. This included expenses immediately preceding or following a substantial business meeting. For instance, if you had a business discussion with a client in the morning and then treated him or her to a golf outing in the afternoon, 50 percent of the qualified expenses were deductible.

Furthermore, a business was allowed to deduct 100 percent of the cost of providing subsidized meals at a company cafeteria or comparable eating facility. For employees, the value of this fringe benefit was exempt from tax.

However, the TCJA eliminates most deductions relating to business entertainment. Plus, the 100 percent deduction for company eating facilities is cut in half to 50 percent for 2018 through 2025 before it is completely wiped off the books. However, the fringe benefit will remain tax-free to employees.

Key exception: Despite the usual 50 percent limit on write-offs for entertainment expenses, a business was generally allowed to deduct 100 percent of the cost of a company get-together. And the TCJA didn’t touch this special tax code provision. Therefore, your clients can still throw a Labor Day barbecue for the staff and write off the full cost of the shindig.

Key point: You must invite all your employees. In other words, you can’t just host a small intimate gathering for the top brass. The company outing can’t be restrictive.

Suppose your client also asks a few friends or family members to attend the company party. This alone won’t cost them the deduction, but they have to allocate costs to these “social guests.” Any part that is attributable to the social guests is nondeductible.

Example: Your client decides to throw a company picnic and invite all of their employees and significant others. In the end, they will have 40 people representing their workforce. In addition, they ask five couples who are considered “close friends,” to come along. Now, there are a total of 50 people expected at the company picnic. As a result, 80 percent of guests qualify as business guests. This means they can write off 80 percent of the cost.

Reminder: Not only does this provide a big deduction for the company, it can be a morale booster after a tough year. Help your business clients take advantage of the tax-saving opportunity.