New Tax Laws and Two Business Deductions Changes You Need to Know About
The 2018 Tax Cuts and Jobs Act (TCJA), effective January 1, makes significant changes to the rules that govern deductions for meals and entertainment expenses. If you have been making such deductions in the past, it’s time to pay attention to these new reforms and understand how they may impact the way you do business. +
Deductions Allowed Pre-TCJA
Entertaining clients goes hand-in-hand with building good relationships and saying “thank you for your business.” It’s been a main stay of good customer appreciation to invite clients out to sporting or cultural events. That time together outside of office provides an invaluable opportunity to interact on a human level, break bread together, and build good will.
The costs of these events were offset by the ability to write off a good portion of the expenses to the business. Pre-TCJA, you were generally able to deduct 50% of the expenses for meals and entertainment for business activities, such as entertaining these clients at golf tournaments, concerts, symphonies, etc.
Some expenses were not subject to the deduction limitations and were fully deductible at 100%, such as
- Meals catered in for employee meetings or delivered for employees working extended hours for business purposes.
- Expenses for employee social gatherings, like holiday parties and summer picnics.
- Expenses considered compensation.
- Reimbursable expenses that are passed on to clients.
- Entertainment that clients purchase.
Post-TCJA Impact on Deductions
Here are two deductions affected that you need to know about. The costs of entertaining clients at golf tournaments, concerts, symphonies, etc., are no longer deductible. Also, the deduction of expenses for those employee meals catered in for meetings or delivered for employees working extended hours for business purposes have two changes:
- Expenses incurred after December 31, 2017, are subject to a 50% limitation.
- After December 31, 2025, there will be no deduction allowed for these expenses.
Those other items listed above (employee social gatherings, expenses considered compensation, reimbursable expenses passed on to clients, and entertainment clients purchase) remain unchanged.
Modify Your Expense Tracking
How will you handle all these changes? Don’t wait. Under the TCJA, these changes to deductions and deduction limitations became effective on January 1, 2018.
One way to get control of your business expenses immediately is to make changes to employee expense reimbursement and accounting processes by aligning them with the new tax rules. This way, from the start of the year, you will properly identify expenses as deductible and non-deductible according to the new tax rules. If you put this off, you will take on a large burden backtracking to correct errors as you adapt to other adaptations you may need to make to comply with the TCJA.
Contact Us with Your Questions
If you have questions, need help implementing new processes, or would like to discuss how these new rules may affect your business, contact a tax specialist at Innovative CPA Group at 203-489-0612 or email Charlie Smith at email@example.com.