What Owners of Medium to Large Businesses Need to Know about the New Tax Bill

February 01, 2018

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In last month’s article, I highlighted the changes to pass-through businesses posed by the new tax bill. Today, let’s look at deductions that affect all businesses, but specifically medium to large size businesses.

That fun you had is no longer deductible

The new tax bill has eliminated the entertainment portion of the “Meals and Entertainment” deduction and has limited the deductibility of meals.

Item

Old rule (through 12/31/17)

New rule (starting 1/1/18)

Meals for clients

50% deductible

50% deductible

Meals for employees

100% deductible-usually

50% deductible-eliminated after 2025 as of now

Office holiday parties

100% deductible

100% deductible

Travel meals for employees

50% deductible

50% deductible

Entertaining clients

50% deductible

No deduction

 

Entertaining clients means

The employer cannot claim a tax deduction for entertainment, amusement, or recreation expenses, or with respect to any facility used in connection with such activity. Prohibited are any deductions for amounts paid for memberships in any club organized for business, pleasure, recreation, or social purpose. In contrast to prior rules, no consideration is given to whether the expense is directly related to or associated with the active conduct of the employer’s trade or business.

Businesses will need to look at the benefits they provide to entertain clients and determine if those expenses are worth keeping without a deduction or if those expenses can be scaled back or resources allocated to conferences and trainings for their clients. Your trusted advisor should be able to help you with those decisions.

50% Bonus Depreciation gets a new name

In addition to the changes in entertainment deductions, there is a change to the 50% bonus depreciation rules, now referred to as “100% expensing” in the new law. This is not to be confused with the Section 179 Deduction which has its own rules and is still available.

 

Old rule (through 9/27/17)

New rule (starting 9/28/17)

Qualified property

Defined here

Same-expanded to include certain film, tv, stage, and live productions, and fruits & nuts planted

Type of property

Must be new property

Can be new or used property

Maximum deduction

50% of cost of asset

100% of cost of asset

Phase-out

Started after 2017

Starts after 2022

Income requirement to take deduction

No

No

 

Since there is no income requirement to take the deduction and most new and used property qualifies, business owners may be tempted to take the entire cost of the asset as an expense in the current year. However, 100% expensing may not be the best tax planning strategy, especially if your income is increasing each year and you are trying to take advantage of the 20% pass through deduction. Going through the process to determine the best strategy for your business should be a part of your tax planning for 2018 and beyond.

Additional items

There are other items for medium to large size businesses to be aware of and plan for in the new tax law, such as:

Item

Old rule (through 9/27/17)

New rule (starting 9/28/17)

Who can use the cash method of accounting

C Corporations and Partnerships with a Corporate partner with average revenues below $5M for all prior years

C Corporations and Partnerships with a Corporate partner with average revenues below $25M for prior 3 years

Who is subject to the 263A Uniform Capitalization Rules

Retailers, wholesalers, and manufacturers who bring in average gross receipts of at least $10M per year

Retailers, wholesalers, and manufacturers who bring in average gross receipts of at least $25M per year

Who is eligible for the Domestic Production Activities Deduction (DPAD)

Generally available for domestic manufacturers and assemblers

Deduction was eliminated

Section 179 deduction

Expense up to $500,000 on assets with a placed in service value of up to $2M.

Expense up to $1M on assets with a placed in service value of up to $2.5M.

Finally, as I mentioned in the previous article, there are many things business owners can do to take advantage of the new tax law. Educating yourself either independently, through the use of internal accounting staff, external trusted advisors, or by reading articles such as these is key. As 2018 progresses, the IRS will issue additional guidance on the new tax law.

Topics: Taxes

Mark Puzdrak

CPA

Mark Puzdrak is a Certified Public Accountant (CPA) with more than 13 years of professional experience helping small to medium-sized businesses with their tax and accounting needs including individual, corporate, and partnership income tax returns along with business and individual tax planning. Mark is a member of the American Institute of Certified Public Accountants and the Texas Society of Certified Public Accountants. He is licensed as a Certified Public Accountant in Texas and Pennsylvania. He earned both of his bachelor of arts degrees in accounting and finance from Lycoming College in Williamsport, PA. Mark is committed to delivering tax and planning services that meet each client's unique objectives with a focus on services for small to medium-sized businesses as well as clients in the Real Estate, Manufacturing, Entertainment, and Professional Services industries. Mark lives in Austin, Texas with his wife, Kelly. He enjoys reading biographies, visiting small Texas towns, and the occasional scotch and cigar.
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