Verifying a dealership’s meals and entertainment (M&E) expenses, as well as breaking out travel and employee events, is always included in Withum’s Year-End Dealership Accounting Checklist. When the IRS selects a dealership for audit, the M&E expenses deduction is always closely examined.
This deduction is among the many tax law changes due to the Tax Jobs and Cuts Act (TJCA) that will affect the dealership industry for 2018’s tax year and going forward. As of January 1, 2018, the new Act revised Internal Revenue Code Section 274 and narrowed the allowable deductions for M&E expenses — meaning extra attention must be given to these expenses.
Prior to TJCA, most M&E expenses (defined as “directly related to the active conduct of his trade or business”) were 50% deductible. Certain items, such as travel, office holiday parties and meals provided to employees on the dealership’s business premises, such as Saturday lunches for technicians, were 100% deductible to the dealership (and tax-free to the employee, if applicable). Business-related entertainment expenses, including event tickets for either employees or customers, were treated as 50% deductible, with tickets to qualified charitable events 100% expensed.
With the restrictions put in place with the revised Section 274, as of January 1, 2018, the biggest change is that business-related entertainment expenses are no longer deductible in any capacity. This “entertainment” exemption category is quite comprehensive and could negatively impact a dealership’s overall tax bill. Dealerships can no longer expense any portion of tickets to theater or sporting events, golf club dues or golf outings, as well as fishing, sailing, or spa outings. TCJA includes tickets to charitable events among the exclusions, making those non-deductible as well.
Additionally, meals provided to employees on-site are now only 50% deductible, until after December 31, 2025, when this switches to completely non-deductible.
What didn’t change? Untouched are business and travel meal expenses, which are still 50% deductible, though new verbiage indicates the meals cannot be extravagant. This means for a round of golf followed by dinner with a business associate (where the business conversation takes place), the only expense allowable is 50% of the dinner.
Also, office holiday events and team-building activities remain 100% deductible, as are items available and offered to the public for free (such as complimentary coffee and snacks for customers).
Since these changes happened at the end of 2017, the accounting for these expenses needs to be handled in terms of the new law, which may include adding expense accounts to the general ledger. Potentially, it may be beneficial to revisit and adjust policies regarding entertainment expenses. Withum would not recommend turning a blind eye to the changes found in the TCJA.
To ensure a smoother year-end, it may be worth revisiting these expenses over 2018 to ensure proper classification to maximize deductible expenses under the new law. As always, feel free to reach out to a member of Withum’s Automotive niche to learn about habits of highly effective managers and for tips to increase operational efficiencies.
If you have any questions on these dealership procedures or for more information, please contact a member of Withum’s Automotive Services Group by filling out the form below.