episode 155 | Entertainment Expenses | Transcript | Rea CPA

episode 155 – transcript

Dave Cain: Welcome to unsuitable on Rea Radio, the award-winning financial services and business advisory podcast that challenges your old school business practices and the traditional business suit culture. Our guests are industry professionals and experts who will challenge you to think behind the suit and tie while offering you meaningful, modern solutions to help enhance your company’s growth. I’m your host Dave Cain.

Dave:  As we all know, after five o’clock, a major part of doing business is networking. Dinners, social events, golf matches, concerts. I can’t even tell you how much time I spent on a golf course, hitting a lousy score over the years, all for the sake of business development and client appreciation.

Dave:  So when the tax cut and jobs act was released late last year, there were a lot of business owners scratching their heads about how to handle their entertainment expenses going forward. It was pretty clear that expenses related to entertainment, amusement, or recreation and most anything that would fun would no longer be deductible.

Dave:  But what about meals and what about any food or beverages consumed during an event? Chris Axene, Rea’s own tax reform development blood hound, has been following this particular provision very closely and was pumped when the IRS finally release additional guidance.

Dave:  I’m pumped up today because today I’m finally going to learn if I can deduct my beers and meals at the Grill Room after a round on the golf course with a client. Welcome back to a long term guest of unsuitable, Chris Axene. Welcome Chris.

Chris Axene: Thanks Dave and glad to be here and first of all, thank you very much for taking one for the team all those years at those miserable golf outings, I know you really were not looking forward to them and I appreciate that you did that for us.

Dave:  Well you know what, that’s all going to change now that we can’t have a beer while we’re playing.

Chris:   Well so hot off the press.

Dave:  Hot off the press.

Chris:   And good news, is the IRS did us a solid. And so as you teed up in your intro with the Tax Reform Act that was passed at the twelfth hour at the end of last year.

Dave:  Don’t be so salty about that.

Chris:   I know, well what happened is they snuck in their, Congress snuck in their provision that said hey, by the way entertainment expenses no longer deductible, incurred after, starting in 2018 and later. It was a surprise for all of us, we weren’t expecting that and the short answer on that is they were looking for Pay-Fors.

Dave:  Sure, yeah, yeah.

Chris: To pay for other things that they gave the taxpayers in the code. So we knew entertainment expenses weren’t deductible but what we didn’t know, because Congress didn’t give us any other guidance because that’s the IRS’s job, was whether meals, and the meals part of that, the meals and the beverages were caught up in that 100% non deductibility requirement going forward. And we’ve been languishing there for nine months.

Chris: And myself and all the other professionals out there, pontificating one way or another, thinking that, I think you’re good or maybe we’re not and bottom line was hey, we’re hoping the IRS gives us some guidance.

Dave: We just didn’t know.

Chris: We didn’t know. And the good news is, as of last week, hot off the press, is they came out with some guidance in the form of what we call proposed regulations, regulations are the IRS’s interpretation of the code and how they will implement what Congress intended. Proposed is, they’re not binding yet but we can rely on them in this particular case.

Dave: Okay. So start amending estimates, quarterly estimates for these rules, can we do that? Dog gone it.

Chris: So the good news is the steak dinner’s deductible again.

Dave: Oh it is?

Chris: It is.

Dave: Okay.

Chris: So it’s subject to all the rules we used to have with regard to business meals, substantiation and ordinary, necessary and not lavish. So those are still around, didn’t change, not impacted by any of this.

Chris: But yeah, when you go to the Clippers game and you buy the Cracker Jacks and a beverage, the good news is, is that we can deduct at least 50%.

Dave: Diamond Dogs still deductible?

Chris: Well, it is but you know what I would refrain from buying enough of those dogs to make the deduction worth anything.

Dave: Yeah. So I want to go back, I want to go back to what you hit, is that hey, the steak dinner’s deductible, but just like it has in the past, but just as it’s been in the past, you have to have the proper documentation and substantiation.

Dave: So for I think that’s worth repeating, because that’s something that’s often overlooked. So what do I need to deduct that steak dinner?

Chris: Yeah, right. So good question and we see this on audit, because the IRS knows it’s an area where the compliance maybe isn’t as great as it could be and that’s what we call the five W’s. So the who, what, when, where and why.

Dave: Okay.

Chris: And that with regard to business meals whether it’s at a lunch during the middle of the day or at the baseball game at the end of the day, the meals part of that requires the five W’s and it really needs to be contemporaneous in time.

Chris: So when you get that receipt you’re writing on it, who are you entertaining, so it must be under the rules, it must be either a current client or a prospect, could also be a referral partner.

Dave: Right, sure. Has to have a business purpose.

Chris: Business, what you were meeting about, the context of the business conversation you had, who was there from both sides and then the where and the when all that should be evidence already on the receipt.

Dave: So the documentation is just as important as it’s ever been.

Chris: That’s right and on audit, if the IRS drills that far down into the details, they will ask for the receipts and they will want to see that and if there’s nothing there that’s not going to be a good-

Dave: You’re toast.

Chris: That’s not going to be a good answer.

Dave: You’re writing a check, you’re writing a check. Yeah.

Chris: So the trying to rely on the memory is not something you want to use in this area.

Dave: So before we leave that area, and we hear this a lot, I’ve heard this a lot, and I’m not sure sometimes how to answer that, hey I put that steak dinner on my credit card and I pay my credit card bill every month and that should be enough for the documentation, is that really true? Do I have to have, do I still have to meet the four W’s or five W’s or whatever.

Chris: You sure do. Yup.

Dave: Okay.

Chris: So the credit card statement does nothing more than maybe tell, certainly it gives you an amount, depending on how the vendor is set up, it’s possible that the where isn’t going to be there because it has some nondescript name that may come through on the statement, that may not, for example, going to the Clippers game and getting a receipt that says Huntington Ball Park, okay, I know where that is. But if you get on the credit card statement it shows up as CC something inc-

Dave: You don’t know what, yeah.

Chris: You don’t know what that is. And so you have those two things, and then, of course, you don’t have the who attended and why did you have it.

Dave: I did want to share with you and this may impact some of your future answers, the three highest markets that listen to unsuitable on Rea Radio, it’s the Cleveland Akron Canton area, Columbus, Ohio, and then the third highest is Washington, D.C., so I just want to let you know your buddies over in Washington D.C.-

Chris: Better be listening.

Dave: Better be listening to your podcast.

Chris: Okay, well I’ve got some advice for them.

Dave: You do? Okay. Okay, take a second look. But Chris, why do you think it took, was it nine months, almost ten months to get this in front of our clients and the practitioners?

Chris: Well, yeah, good question. So the IRS as an organization has been dealing with a limited budget for many years. In part because Congress has refused to increase their funding because they didn’t feel confident that the agency was being run in an effective manner and effectively using taxpayer dollars.

Chris: Of course the agency uses that as an excuse to say, well we can’t do our job because we don’t have sufficient funding. So, unfortunately, some of the stalemate back and forth you get in D.C. I think is somewhat involved here, but the reality is, is the tax code was so encompassing in the areas that were impacted, not just this area but many others that it’s taking them this long, and I’m not surprised in a way and I’m hoping that we’re not done yet, that they are, other areas that they’re going to be issuing guidance here before we get to the end of the year.

Dave: I want to back up to the credit cards. We have a member of the audience, I think they’re sick or they have a cold, they just threw a question our way about credit cards, and said, well how do you account for purchases charged on a credit card for meals and entertainment, I believe that’s the crux of the question.

Dave: But it goes back, you still have to have all of the documentation that you talked about earlier, the five W’s.

Chris: Yeah.

Dave: No matter what you’re using that credit card, there are no exceptions.

Chris: Right, so yeah, so the five W requirements in the code, that’s the law.

Dave: Okay.

Chris: And so the credit card company doesn’t know why you were there and so they’re not going to provide any of that information.

Dave: You don’t get a free pass for using your credit card.

Chris: You don’t get a free pass.

Dave: Yeah.

Chris: So oftentimes what we see in our clients, particularly the smaller ones, is they will, their monthly credit card statement is $5,000 and it’s got all kinds of things in it, they may have gone to Staples for office supplies, they took a client to the baseball game, and they just lump it into one account and then if you ask my accountant, and then it’s up to the bookkeeper here at Rea to go through and look at that and actually dive into the detail to then, it’s kind of a holding account if you will to divide that back out into various buckets that it needs to go into including meals.

Dave: Right, okay. I think it’s probably, I have some questions maybe just through your way, and say hey, is this deductible?

Chris: Is this like the fast 50?

Dave: It’s fast 50. And you can say yes, no, or you’re famous answer is, well it depends.

Chris: That’s a solid answer.

Dave: That’s a solid answer. So here we go, you ready?

Chris: I’m ready.

Dave: This is kind of like a little quiz show.

Chris: Can I ding in?

Dave: You can, take a highly technical situation and see if we can have some fun with it. Country club dues.

Chris: Nondeductible.

Dave: Nondeductible. Not even if I take clients out?

Chris: The dues part is nondeductible, hasn’t been deductible since you started practicing.

Dave: Social clubs.

Chris: What do you mean by social clubs?

Dave: Supper club.

Chris: Yeah, nondeductible.

Dave: Nondeductible. How about Rotary, Kaunos, Lions, Elks?

Chris: Deductible.

Dave: That’s good. Elks deductible?

Chris: No, no.

Dave: Wait, wait, Elks deductible?

Chris: No.

Dave: Oh. Health clubs, spas, gym memberships.

Chris: Generally no, but there may be a deduction on the personal side if you get a doctor to sign off on it that you need it.

Dave: Okay, I noticed today you’re looking a little dapper in your outfit, and you look like you’re-

Chris: I dressed up for the podcast.

Dave: Yeah, and so, is that specialized clothing deductible that you’re wearing today?

Chris: It is not.

Dave: It is not deductible.

Chris: Not deductible.

Dave: Just for the CP profession or if you need-

Chris: Period.

Dave: Period?

Chris: Yeah, this is capable of being worn on Sunday just as it is today, so nondeductible.

Dave: If you wear scrubs to work do you get to deduct those?

Chris: Well so now that’s interesting, scrubs, you get tired into specific profession, so perhaps there’s a way that could be deductible for medical professionals who have to wear them.

Dave: So there’s always discussion, there’s something, never really say no but you’ve got to ask more questions.

Chris: You do and I have answer example of that, as I have a client that is in the medical profession that he sees patients and his uniform is a suit and he likes to shop at Nordstrom’s and he feels that because that’s his uniform he should be able to deduct that.

Dave: And?

Chris: And if you’ve heard what I said today what do you think the answer to that is?

Dave: Answer is no.

Chris: No, absolutely not.

Dave: That’s right.

Chris: But the business can still pay for it.

Dave: Correct.

Chris: But not deduct it.

Dave: Right, so that’s right. So the business can still pay for my country club dues but not deduct it.

Chris: Right.

Dave: I mean there’s a little bit, is that income to me?

Chris: Well the answer is it depends.

Dave: I knew, I was waiting for it. I was waiting for that.

Chris: I didn’t even try hard not to say it.

Dave: Okay, let’s move on. I don’t know that we want to answer that question here, the clients listening, come on in, we’ll have a conversation and we’ll look at the facts for you on that.

Chris: I need to go on a fact-finding mission to the particular club in order to answer that.

Dave: Sure, sure. Employee lunches?

Chris: Yeah.

Dave: Okay, do I have to have all those documentation for employee lunches?

Chris: So we had some, we had the tax law changed a little bit, the employee lunches. Used to be there was the ability to, if they were infrequent and for their benefit, an example might be a business season lunch or business season dinner, and they’re working long hours, et cetera, that the company could deduct 100% of that. Under the new tax law, that has been reduced to 50, but it’s otherwise deductible at that threshold.

Dave: Client holds a training session, has food at lunch, and after work, they go out, have hors-d’oeuvres and cocktails.

Chris: For who?

Dave: Everybody that was there.

Chris: I mean who was there? Employees only?

Dave: Employees, employees.

Chris: Yeah, so generally speaking-

Dave: You’re going to give me that one, huh?

Chris: That should be, but again not every week. So we get back to this kind of line in the sand so to speak of how frequent is it.

Dave: Well training can happen daily if you’re into it.

Chris: Yeah, so if you’re going to the bar every day after your training, that’s not going to fly.

Dave: There’s a discussion to be had there.

Chris: Yeah, yeah.

Dave: And again, I think it’s interesting to point out you and I have a lot of fun with this stuff, talk about it in a high level, technical and then kind of go through this thing, but at the end of the day you have to sign a tax return as will our client and that little small print on there says that you’re correct and accurate and et cetera. So there are penalties for all involved if you sign those returns.

Chris: Right.

Dave: And taking responsibility for certain expenses that just aren’t there.

Chris: And back to my client example of my advice to him was yeah, you can go continue to buy your suits at Nordstrom and expense them to the business, but I’m going to continue to go look for it and find it and add it back on your tax return so you’re not getting a tax benefit for it.

Dave: What about airplanes and fast cars?

Chris: Well it depends. Pass.

Dave: Pass, okay. Alright, again, that’s a conversation, again let’s bring that conversation, that’s a conversation that needs to be had, a lot of facts, behind closed doors because what may work for client A probably doesn’t work for client B and so forth.

Chris: The rules for aircraft in particular are very complex when you look at the main reason why, the main expense that the client wants to be able to deduct as quickly as possible is the cost of the plane through depreciation, and there’s some pretty technical and complex rules that apply in order to get the fastest write off that you can.

Dave: I think we talked about a little bit of why there was confusion early on about what was deductible following the release. Just so we cover that, we covered all the confusion, we’re good to go with entertainment expenses?

Chris: I think so, entertainment, nondeductible, that’s the bad news. Meals part of it deductible, we’ve kind of covered the easy part of that is when it’s separately incurred and purchased, so you’re sitting in the stands.

Chris: The other example that where maybe it gets a little complicated is let’s say you buy the box that it comes with catering. So then it can get complicated in terms of the invoice you get, does it have one number on it that covers both or does it have, is it separately broken out? And the answer on deductibility depends on that.

Dave: Okay. Alright. Now we’re getting into the good stuff. Okay, so I invite you out to the country club, which my dues are nondeductible, we have breakfast, we talk business, that’s deductible. What about the round of golf? Is that entertainment?

Chris: Yup, that’s entertainment.

Dave: Nondeductible.

Chris: In spite of when you play with me and I know you get zero entertainment value out of it, it is entertainment.

Dave: It is entertainment. So again those golf matches, nondeductible. The meal before and after, and you’re talking business, is deductible.

Chris: Right.

Dave: Okay.

Chris: Remember you’ve got to have the five W’s and as long as they are present, yes.

Dave: Okay, what about situation where you have a client appreciation dinner for a client and his spouse, his or her spouse, that is not involved in the business. Would the spouse’s meal be deductible?

Chris: Yeah, so good question and generally speaking the answer is yeah.

Dave: You go for it?

Chris: You go for it.

Dave: Man, you’re softening up in your days, you used to-

Chris: Well it’s the end of the day.

Dave: How about the, yeah, it’s the end of the day. How about that airline ticket? I’m going out to convention out in Vegas, taking my spouse, clearly the convention’s business-related, it’s the top podcast host convention out in Las Vegas, so clearly deductible. But I’m taking my spouse, is that deductible?

Chris: You probably crossed the line at some point between the cost of a meal for the spouse and the airline ticket and the hotel.

Dave: I just didn’t know I crossed the line.

Chris: You just didn’t know you crossed it, yeah.

Dave: Again we laugh about that, but those are types of things that you have to have discussion with your advisor because there are different cases in most instances where we have to have the facts.

Chris: That’s true and look, I think you could construct a fact pattern using the spouse is going someplace where you could get the deductibility because of the nature of what the spouses are going to.

Dave: Right. Anything else on the horizon that we need to know about that you can fill us in, in the next few minutes?

Chris: Well, so the other guidance that came out that we were hoping for was not in the entertainment area but in the pass-through deduction area, 199 Cap A. So I don’t know how far you want to dive into those weeds on this call, or this podcast, but we did get some-

Dave: We’ll need another session on that, that’s pretty deep.

Chris: It warrants its own session, but the good news is we got some guidance on that, that covers some of the questions we had and so that’s helpful.

Dave: And for just expand on that, pass-through entities, when you use that term, you’re talking about S corporations and LLC’s and partnerships.

Chris: And sole proprietorship.

Dave: And sole proprietors. Okay.

Chris: And trusts and estates. So things that issue a K1 to an owner.

Dave: Lots going on there folks, call Axene, he can set you up. And I think you also shared with me, isn’t there something going on with LLC’s and self-employment tax that we need to be aware of or is that still being kicked around?

Chris: No, so and that has nothing to do with the new tax law, but it has everything to do with the evolution of case law as it applies to taxes with regard to LLCs stacks to partnerships, and the self-employment tax on income allocated to them on their K1.

Chris: And there was a position in the past whereas long as you were paying the partner what we call a guaranteed payment which is a salary.

Dave: Right.

Chris: A reasonable salary, that you could exempt the income allocated to them from self-employment tax.

Dave: How long have we been waiting for that piece of guidance?

Chris: Well the IRS-

Dave: 20 something years?

Chris: Yeah, the IRS originally proposed regulations in 1997 and Congress came back a year later and said nope, this is our area to give guidance on and then they never did.

Dave: Okay. You know Chris in the couple of minutes we have left, I think it’s always appropriate when we talk about the tax law and the tax cuts, any winners out there that you’re running across? I know it hasn’t been truly tested, any winners out there?

Chris: Well, so with any major tax reform there are winners and losers. I think on the individual side, I think there is going to be a bit of a hangover come April when everybody is filing their tax returns.

Chris: What I would say is, and I say that because Congress monkeyed with the itemized deductions and capping state and local tax deduction piece of that, they got rid of personal exemptions. If you are a middle-income family that has kids that are under 17, 17 or under, I think you’re probably going to come out ahead under the new law then the old law.

Chris: If you are somebody that has kids older than that, that are still at home and still dependents, you’re probably going to come out on the other side of that scale, unfortunately.

Dave: So are there any other patches to the tax law on the horizon?

Chris: Well Congress right now actually has and I think it’s in the House, there are three bills, separate bills that are all tax 2.0, tax reform 2.0 related that are out there, whether or not they go anywhere it remains to be seen.

Chris: I am highly doubtful that anything gets done certainly before the election in November, and if we lose seats on the conservative side, then the likelihood is even less after that.

Chris: Technical corrections as well as all the changes on the individual side and the estate and gifts side were temporary and will expire, and so that’s what some of these bills are doing, trying to make those permanent.

Dave: Okay. Action plan, couple takeaways for our listeners?

Chris: Well year-end planning is key particularly this year and we’re doing this within our current client base but see your accountant, make a date to have a conversation and run projections so that you aren’t surprised when you come in April to file your tax return. So planning, planning, planning.

Dave: And more planning.

Chris: Right.

Dave: Has anybody ever referred to you before as a bloodhound?

Chris: No, maybe a leech but never a bloodhound.

Dave: Yeah, that’s quite a compliment. Our guest today has been Chris Axene with Rea and Associates and as you can tell from the discussion, Chris is head of our tax strategy and implementation group, high priority on planning and all around good guy, never post a score, so we don’t know what his true handicap index so, buyer beware.

Chris: Thanks Dave, I appreciate that.

Dave: Thanks again for joining us Chris.

Chris: Yup, we’ll see you next time.

Dave: All jokes aside, the business meal expense deduction is a big deal for many of us as are those credit card charges and a lot of other business-related expenses so I know our listeners appreciate you breaking it down for them in a rather comical way, so appreciate the presentation.

Dave: Hey listeners, we’ve accumulated a wealth of information and educational resources dedicated to the tax cut and jobs act. Be sure to check them out. To get to them just look for today’s episode at reacpa.com/podcast, and scroll through the additional resources section of the page.

Dave: If you enjoyed today’s episode we want to know, like it, comment on it or share it with your colleagues. And don’t forget to check out videos of our podcast on YouTube. Until next time, I’m Dave Cain, encouraging you to loosen up your tie, think outside the box, and grab a steak.

Disclaimer:  The views expressed on unsuitable on Rea Radio are our own and do not necessarily reflect the views of Rea associates. The podcast is for informational and educational purposes only and is not intended to replace the professional advice you would receive elsewhere. Consult with a trusted advisor about your unique situation so they can expertly guide you to the best solution for your specific circumstance.