The Tax Cuts and Jobs Act modified the rules relating to the deductibility of entertainment expenses. In general, entertainment expenses are not deductible under 274(a). Exceptions to this rule exist, however, for certain entertainment expenses incurred for the benefit of employees. Under 274(e)(4) entertainment expenses primarily for the benefit of employees, other than employees who are highly compensated employees are 100% deductible.
For purposes of this exception, highly compensated employees are defined under 414(q) 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 $220,000 for 2018, $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.
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.)
Should you have any questions please contact your RubinBrown trusted business adviser.