The Tax Cuts and Jobs Act of 2017 (Sec. 199A) is changing how your business tax return looks, in more ways than one. Earlier this year we outlined the big tax law changes going into effect in 2018. However, there are several more nuanced ways that this tax overhaul will directly impact how companies do business.
From major corporations to single-member LLC entrepreneurs, business entertainment expenses can be a significant source of obtaining business and in the past, were also the source of a tax break. Now the new tax law is limiting tax deductions on business entertainment expenses. There are a few key strategies small businesses can employ to spend and document wisely in this arena, leading to strategically paying fewer taxes.
Business Entertainment Expenses Sent Packing
Back in 2017 and earlier, small businesses relied on business entertainment expenses and the popular tax return deductions that they could yield. This included business and employee meals, client entertainment (think sporting events or the theater), and even transportation for employees. As the details of the tax law changes become more and more clear (though some details are still in the dark), these deductions look like a not-too-distant memory.
The business tax changes now eliminate any deduction for sports tickets, concerts, theater tickets and other entertainment expenses. Also eliminated are employee commuting expenses, such as mileage reimbursement, parking or transit passes. New, lower limits are set for specific employee meals. The specificity of those meals is one of the details still left in the dark – will companies still be able to claim that 50% deduction for meals with clients or associates, or is that considered non-deductible entertainment?
Part of the problem: business entertainment expenses are difficult for the Internal Revenue Service to enforce. The solution: eliminate most of the deductions, leading to an estimated $40+ billion in tax revenue over the next nine years.
How is Your Businesses Tax Affected by the Tax Law Changes?
Wondering if your small business will be affected and need to change your
business entertainment expense policy? Here are a few examples of common expenses, how they were once deducted, and how they stand to be deducted on your 2018 business tax return.
- Client-Appreciation Party. Do you hold an annual event to pay homage to your clients? Before 2018, 50% of the cost would have been deductible. Now this is in question, particularly if employees attend. Is it a meal? Is it entertainment? It could now be 0% deductible.
- Season Tickets to a local Basketball/Baseball/Football Team. Before 2018, 50% deductible. Now, no deduction. Side note: this could potentially hurt ticket sales for professional teams across the board. Some teams are even trying to separate meal costs and marketing expenses (like banners on the field or scoreboard) from ticket costs to help keep some of the costs deductible.
- Employee Lunches. Do you like to bring in lunch for team building activities or long meetings? What was once 50% to 100% deductible is now just 50% deductible. In 2025 the deduction will be eliminated completely.
- Employee Transportation. If you work in an area where parking is at a premium or your employees use their own car for long-distance meetings, reimbursing employees for parking, mileage or public transit is common. And before this year, it was 100% deductible. Now no transportation is deductible.
- Fight High Tax Rates. It’s worth noting that although big corporations are subject to the same business entertainment expense changes, the same tax law changes cut their tax rate to 21%, which lowers the dedications’ value. Compare that with small businesses that are now in the 29-37% tax rates, so deductions are more valuable to them.
Business Tax Strategies
Think about how you used to do business in regards to entertainment expenses and the anticipated deductions. Now think about how you can still make clients and employees happy without suffering the non-deductible expenses.
Eliminate transportation reimbursement. Rather than reimbursing employees’ transportation expenses, you could opt for a salary increase comparable to the transportation cost. And encourage the use of company vehicles whenever possible.
Rethink the open house. Instead of hosting a client and/or employee lunch, speak with vendors and see if they would be willing to host an open house at your office (i.e. they would purchase the food). This could also lead to great networking opportunities between employees, clients and vendors. Or make employee lunches part of ongoing training or continuing education, thereby keeping the 100% expense deduction. Either way, make sure business is discussed and the expense is classified as “meals.”
Make it a celebration. Company activities that celebrate a holiday, anniversary, birthday or other company accomplishment remain 100% deductible. Just don’t overdo it and abuse the deduction, and document it is as “meals – celebratory.”
Search out tax credits. As opposed to tax deductions that lower your taxable income, tax credits actually give you money when you complete your tax return. Take a tip from Amazon, a company that legally worked the system to pay no federal taxes in 2017. Top tax credits to explore are those for research and development on new products, hiring new employees and developing real estate (all things Amazon did well in 2017). Other small business tax credits worth the research include the Child Care Credit, Work Opportunity Credit, Employer Wage Credit, Disabled Access Credit, Small Business Healthcare Tax Credit and the Federal Empowerment Zone Tax Credit.
Your best strategy when it comes to abiding by the tax law changes to business entertainment expenses is a knowledgeable and experienced tax advisor (another nod to Amazon!). Not only can he or she guide you through the evolving tax front, but with Stableford’s integrated advisory services, you’ll also learn how to make the best moves going forward to minimize risk and maximize tax incentives and growth. It’s never too early to enlist tax services and plan your business tax return. Contact Stableford Capital tax services today by calling the main tax line at 480.998.0911.
* The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought.