On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act. This Act completely reformed many areas of tax law including meals and entertainment rules. These rules will impact just about every pharmacy in the industry. Gone are the days of deducting expenses to take your local health provider to lunch to discuss your new compounding lab.
That’s right. These rules should not be ignored. Beginning January 1, 2018, the entire game changed with regard to business meals and entertainment.
Business Meals and Entertainment
Prior to the Tax Cuts and Jobs Act of 2017, meals and entertainment rules were last updated in the Tax Reform Act of 1986. The 1986 Act stated business meals and entertainment were not deductible unless the expense was directly related to, or associated with, the active conduct of your pharmacy business.
Not only did you need a bona fide business reason for the meal or entertainment, but proper documentation was also required, including who, what, when, where, the business purpose, and the amount. If you met these requirements, you could deduct 50% of the business and meal entertainment expense. To taxpayers, this was reasonable and it stood in tax law for over thirty years.
Under the new rules beginning in 2018, any expense incurred with respect to (1) any activity considered entertainment, amusement or recreation, (2) membership dues to any club with a business, social, recreation, or pleasure purpose, or (3) any facility used in conjunction with (1) and/or (2) above is nondeductible. In other words, any expense you incur, including meals, to entertain a business vendor, doctor, or patient is nondeductible.
For example, taking the new doctor to dinner to introduce your pharmacy, playing golf, or going to a professional ball game with your key wholesaler rep to discuss the contract revision is now nondeductible. The good news is you do not have to document these types of expenses anymore. However, this will significantly impact pharmacies that use meals and entertainment to grow and foster business relationships. You can expect some disgruntled taxpayers as they become aware of this new rule.
What about lunch for your employees? Any meal served to employees at the pharmacy for the convenience of the employer is 50% deductible. To be eligible for the 50% deduction, it must be (1) on the premises of the pharmacy, (or a like business premises that qualifies, such as a hotel conference room), and (2) for the convenience of the employer.
A breakfast meeting for all employees to discuss the new workflow before opening the doors for business, or a lunch provided by the pharmacy so the staff can work through a busy Monday is 50% deductible.
Any meal you or your employees incur while traveling for business is 50% deductible. If you and your PIC travel to the wholesaler conference and dine out a couple of nights for some local fare, this expense will be 50% deductible. Be careful, entertainment expenses after dinner will be nondeductible.
The tax law gives a break for employee parties. Recognizing employees and their spouses at an annual party, or something similar, is 100% deductible if most of the employees attend! The key to making this 100% deductible is to document the expense properly, including the purpose of the party. Proper documentation for 50% or 100% meal expenses should include who, what, when, where, the business purpose, and the detailed amount. The more detail you can provide in your documentation, the better support you have for any deduction if it is ever scrutinized by the IRS.
In regard to the chart of accounts for your pharmacy business, we suggest you create three new accounts:1) Meals and entertainment-nondeductible, 2) Meals-50%, and 3) Meals-100%. Make sure you keep your accountant up to date on these types of expenses as they are incurred and be careful not to confuse the three accounts.
You can bet this will be a hot topic for the IRS in the days and years ahead, so please make sure you have a full understanding of how the rules apply to your pharmacy. With that – as of the writing of this article – the IRS has yet to issue further clarification or guidance on these rules which we expect to occur soon.
Congress gave full power to the IRS to implement these new rules so there may be some significant changes as it is interpreted by the IRS. Look to Sykes & Company, P.A. and our Tax Reform Updates page to be on top of any new changes or interpretations in the months ahead and what it means for you, the pharmacy owner.
Scotty Sykes, CPA, CGMA
Sykes & Company, P.A., is the premiere accounting firm for successful independent pharmacies across the U.S. We have been serving independent pharmacies for over 35 years and are involved in every aspect of pharmacy accounting, including the tax and business advisory needs of pharmacies and their owners. We also offer all of the tools and knowledge we have gained serving pharmacies nationwide to our local clients who include individuals, families and business owners. www.sykes-cpa.com