Should You Rethink Your Marketing Plan under the New Tax Law?
posted Apr 9, 2018 by Mitchell S. Halpern, JD in the Global Tax Blog
Companies will be allowed to deduct fewer meals and entertainment (M&E) costs, starting in 2018. Without the tax savings to bank on, some companies are cutting their marketing budgets. But doing so could compromise sales over the long run. Here’s an overview of the changes and ways to spend more wisely.
Under prior law, companies could generally deduct 50% of business-related meal and entertainment expenses that were provided for the benefit of customers. In certain circumstances, exceptions allowed bigger deductions.
For costs incurred after December 31, 2017, the Tax Cuts and Jobs Act (TCJA) disallows deductions for the most common business-related entertainment expenses, including the cost of facilities used for most business-related entertainment activities. Examples of nondeductible expenses include the cost of:
- Tickets to sporting events and private boxes,
- Theater tickets,
- Golf club dues and company golf outings for customers, and
- Hunting, sailing and spa outings.
Some business entertainment expenses may still be deductible in very limited circumstances. In addition, business-related meals provided to customers are generally still 50% deductible under the new rules.
Under prior law, companies could deduct 100% of the cost of tickets to fundraising charitable sporting events under certain circumstances — such as a golf tournament when all the proceeds were donated to a charity. This exception was eliminated by the TCJA.
The new law doesn’t change the rules for M&E costs that are provided for sale to customers or that are made available to the general public, however. These are generally 100% deductible before and after the TCJA. Different rules apply to M&E costs provided to employees.
The substantiation rules for proving that meals are business-related still apply. But, under the TCJA, companies may need to modify their recordkeeping to separate nondeductible vs. deductible costs.
Time to Trim the Budget?
If your business spends a lot of time and money entertaining customers, the loss of these deductions could be costly. So, it’s important to manage your marketing budget closely. But, beware, budget cuts that lower today’s costs often reduce tomorrow’s sales. If a competitor takes your top customer to the Super Bowl or on a fishing retreat, will the company take its business elsewhere? If you stop sponsoring events at an industry trade show, will you reduce brand awareness?
Encourage sales and marketing people to spend smarter. For example, opt for bleacher seats over a private box this baseball season. And limit invitations to major outings to only your top customers and most promising prospects.
In addition, treat major events like strategic investments, such as launching a new product line or buying a piece of equipment. Ask your marketing department to compute return on investment (ROI) to justify major events or sponsorships. To capture ROI, you might track business from participants six months before and after an event or outing. Doing so can help provide quantifiable evidence of the number of attendees that were won over by your efforts.
For More Information
In the coming months, the IRS is expected to issue additional guidance to clarify exactly which M&E costs will be deductible under the new law. Our tax professionals are familiar with the TCJA and can help evaluate your marketing plan under the new law, brainstorm ways to save money and compute ROI, and establish policies and procedures to document your business-related M&E costs.