Some Entertainment Expenses May Still Be Fully Deductible

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Feb 01, 2020

When the Tax Cuts and Jobs Act was signed in December 2018, it modified the rules relating to the deductibility of entertainment expenses. In general, entertainment expenses are not deductible under 274(a). However, entertainment expenses primarily for the benefit of employees, other than employees who are highly compensated employees, are 100% deductible.

Highly compensated employees for this purpose are defined as any employee who 1) was a 5% owner at any time during the year or the preceding year, or; 2) for the preceding year had compensation from the employer in excess of $225,000 for 2019 or $230,000 for 2020; and, was in the top 20% compensated employees paid during this year.

Accordingly, entertainment expenses incurred primarily for employees in the lower 80% of compensation (unless a 5% or more owner) are 100% deductible.The portion relating to the highly compensated individuals is 100% deductible as well.

Examples of entertainment expenses that are primarily for the benefit of employees who are not highly compensated employees that are 100% deductible include:

  • Holiday parties
  • Company picnics
  • Department gatherings and outings
  • Event tickets (sporting, theater, etc.)

If you are unsure of your specific situation, please feel free to reach out to your accountant at Terry Lockridge & Dunn.They can be reached at 319-364-2945 in Cedar Rapids, or 319-339-4884 in Iowa City.