2018 is coming to an end and it is almost time to file your taxes again. The 2019 filing season is going to be challenging; with the new law in place, there are a lot of uncertainties and it is important to communicate with a business tax expert and ask questions. One of the things owners need to address is the deductibility of their expenses, as the Tax Cuts and Jobs Act (TCJA) has had a significant impact on this subject. Employers may want to consider updating their expense and reimbursement policies as a result.
Before we look at some examples of the changes let’s talk about the nature of deductible expenses. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Even if an expense is both ordinary and necessary, it still might not be deductible if the IRS deems it lavish or extravagant.
What are some examples of changes in business tax law?
Meals and entertainment – Under the old law, meals and entertainment (M&E) were 50% deductible, meaning you could just cut your M&E account in half when figuring out your taxable income - easy enough. Under the TCJA, things are not as simple. Entertainment is completely non-deductible for years starting after December 31, 2017. Meals, on the other hand, retain 50% deductibility, unless they are deemed lavish or extravagant. At the very least, business owners should consider splitting those expenses into separate accounts on their books.
Still, it seems rather straightforward, generally speaking, but there are plenty of circumstances that will require further clarification. For example, what about the meals that are provided in connection with nondeductible entertainment, such as hot dogs and drinks purchased at a baseball game? According to the IRS, “Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event,” so the hot dogs and drinks would be partially deductible because they were purchased in a separate transaction from the tickets to the game. Meals provided for the convenience of the employer, such as those served to employees at in-office cafeterias, used to be 100% deductible if they were excluded from the employees’ gross income as de minimus fringe benefit. Under the TCJA, those meals are 50% deductible through 2025, after which they will be completely nondeductible.
Transportation fringe benefits – Historically, certain business deductions have been more beneficial to some taxpayers than others, and Congress hoped that the TCJA would level the playing field, so to speak. Deductions for qualified transportation fringe benefits, such as parking, vanpooling, and transit passes, were more advantageous for people living in urban areas, so most of them have been eliminated. Parking in urban areas, however, is an unavoidable expense, so it is important to figure out the associated costs. There are examples in the new law explaining how to come up with the Fair Market Value of parking. Some employers may discontinue those benefits, but it is important to weigh the costs created by the new law against the benefit of retaining a talented workforce through competitive compensation package.
Unreimbursed job expenses – There are changes in the business realm that affect individual tax returns of employees as well. One such change that will undoubtedly cause some frustration is that unreimbursed business expenses are no longer deductible for taxpayers who itemize. It may not sound like a big change for some, but for many, it can be a significant adjustment. For example, sales representatives cannot deduct travel expenses, nurses cannot deduct the cost of scrubs, and construction workers cannot deduct the cost of their basic tools. Businesses that require employees to incur work-related expenses personally should consider implementing reimbursement or allowance plans to minimize the effects of this change on their employees’ tax liability.
Need help? Contact us to assist with your questions and help assess and evaluate the impact of the TCJA on your organization.