The tax rules have changed a few expenses.
The biggest shocker, the one that has left all of us tax professionals scratching our head, is the change to entertainment expenses.
Spoiler alert – this is a very BAD change.
Before, you could claim as a deduction and receive a 50% tax break on any expenses relating to things you did for fun that you could relate to your business. Things like golf, football games, skiing, Disneyland, fun little business building activities, and business meals with clients or prospects.
After, you are not allowed a tax deduction for entertainment expenses even if there is business purpose to it. Meaning, entertainment for the purpose of generating business income or other specific business benefits is no longer a tax deduction. Meaning, sitting down with that client or future client over a cup of hot chocolate, or coffee if you are into that sort of thing, is no longer a tax deduction.
You can still claim a deduction for entertainment, amusement, and recreation if you treat those expenses as compensation to employees that are included in their wage amounts.
And you can claim these types of expenses if they are primarily for the benefit of employees.
Before, you could claim as a deduction and receive a 50% tax break on any expenses relating to eating out when there was a business discussion that happened during that meal. As an owner, if you provided food to keep your workers on the business premise so they can continue to work, you were able to deduct 100% of those.
After, business meals with clients or prospects is terminated. That is no longer allowed. You can still claim expenses directly related to business meetings of employees, stockholders, agents, or directors. So when you are traveling, you can still claim your travel meals. However, you don’t get a tax deduction for those meals you provide for your convenience to keep workers on premise. Better have a meeting they are required to go to in order to keep that a tax deduction. And now to complicate it, you do get a 50% deduction for providing food to your workers if through an eating facility meeting “de minimis” fringe requirements.
What does the entertainment and meals change mean to you?
If you found yourself using business entertainment as a source of business growth, business just got more expensive. If you just find that you had a lot of these entertainment expenses or eating out with clients, this tax change will increase your net income. Which means more tax.
To finish off this post, here are three more changes that won’t affect as many people, but are worth knowing about.
Before, you could deduct your transportation cost if you provided benefits to your workers for their transportation to your office, parking, transit passes, bicycle commuting reimbursements.
After, you don’t get to claim that as a deduction.
So if you were providing those benefits, you will just need to pay your employee the equivalent cost. So their wage amount will be higher and they will cover those costs directly now.
Research and Experimental
Before, you could deduct as an expense OR “amortize” the research expense over 5 years.
After, you have to “amortize” the research expense over 5 years.
This means when cash leaves your business for research expenses, you can not claim the full amount as a tax deduction. You will have to take the full cost over 5 years instead.
Before, you could basically expect to be able to expense 100% of any business interest.
After, if your business is more than $25 million in revenue, you have new limitations on if you can expense all your business interest expense.
We have a handful of clients that do more than $25 million in revenue, but for most of our clients, this doesn’t change anything.
Our next post will go over 2 changes that affect the real estate world.
We also guest posted a summary article on some of these major changes here.