Tax Court Limits Business Meals Expense

Take This Example

In a new case, a business owner was only able to salvage part of the deduction he claimed for business  meals. For example, the Tax Court denied the any write-off for expenses that appeared to be purely personal nature, such as cups of coffee he ordered just for himself (Lombardi, TC Memo 2017-4, 1/4/17).

Generally, you may deduct the cost of business meals when you travel  away from home on business or you entertain business clients immediately preceding or following a substantial business deduction. The deduction is limited to 50 percent of the cost. Therefore, if you wrap up a major business deal and treat the client to dinner and drinks costing $1,000  afterwards, including amounts attributable to significant others, you  can deduct $500.

But the IRS won’t simply accept your word for it. For entertainment expenses, you must keep records indicating the following:

  • The amount of the expense;
  • The time and place of the entertainment or expense;
  • The business purpose of the entertainment or expense; and
  • The business relationship to the taxpayer of the “person or persons entertained.”

Unfortunately for the taxpayer in the new case, he failed to deliver the tax goods.

Make sure to consult with your tax advisor for your particular situation .

Highlights of the Tax Cuts and Jobs Act of 2017

Highlights of the New Tax Law for 2018

Now that the Tax Cuts and Jobs Act (TCJA) of 2017 is on the books, people saving for retirement and people who are already  retired (that's everybody, really) should consider how the new law will  affect their financial planning.  

Highlights of the new tax bill include the following provisions that kick in for 2018:

  • An overall lowering of the tax bracket rates, including the top tax bracket which falls from 39.6% to 37%
  • Personal exemptions are repealed

For taxpayers who itemize deductions:

  • State and local income and real estate taxes are capped at $10,000 per year.
  • Home mortgage interest from home equity loans will no longer be deductible.
  • Home mortgage interest on new mortgages is only deductible to the extent of $750,000 of acquisition indebtedness.
  • Charitable contributions of cash can be deducted currently up to 60% of adjusted gross income (up from 50%).
  • Miscellaneous itemized deductions including unreimbursed employee business expenses, tax return preparation and investment management fees are no longer deductible.

Other new tax changes include:

  • Standard deduction for joint taxpayers increases to $24,000.
  • Child tax credit expanded and will be allowed at higher levels of income (phasing out beginning at $400,000 of income in place of $110,000).
  • Up  to a 20% deduction for income earned by "pass-though" businesses such  as partnerships and S corporations (subject to a bunch of limitations)
  • Alternative Minimum Tax (AMT) provisions are retained, but fewer people will be subjected to its reach
  • Lifetime  exemption from estate and gift taxes double for 2018 - potentially  allowing for a great deal of planning to occur for those who haven't  adequately protected their estate or who can now take advantage of the  higher limits


2018 Business Tax Changes with the Tax Cut and Job Act (TCJA)

  • The new law reduces the C Corp. tax rate to a flat 21% . For pass-through entities, those entities get a special 20% reduction for owners’ to take, with some limitations. 
  •  Elimination of the corporate alternative minimum tax (AMT).
  • The new law expands the limitations on the cash method of accounting. Companies can use the cash method of accounting for gross receipts of $25 million over the past 3 years (up from $5 million.)
  • After 2017, entities, generally, can carry a net operating loss (NOL) forward, not back. As a bonus, taxpayers can carry forward the NOLs indefinitely. Prior to TCJA, the IRS restricted NOLs to a 2-year carry-back, 20-year carry-forward time-frame. In the past, the NOLs expired after the 20-year mark. 
  • The new law eliminates deductions for business entertainment. Under  TCJA, businesses cannot deduct expenses related to amusement and recreational facilities, membership dues, etc. Those booster seats and club-level suites will take a big hit with this change. Traditional business (travel) meals keep the 50% deduction. 
  • The new law increases the Sec. 179 expense deduction. Businesses can expense up to $1 million under Sec. 179. If a business places more than $2.5 million of property into service during the year, it must reduce its $1 million Sec. 179 deductions by the excess over $2.5 million.  Additionally, the regulation expands to cover certain property placed into service related to furnishing lodging. Furthermore, a business making certain improvements (roofing, HVAC) to non-residential  properties can expense those improvements, as long as the improvements do not enlarge the building and are not structural in nature. 
  • TCJA increases the depreciation limit on luxury auto purchases. If  a business purchases a passenger vehicle, which falls under the luxury auto definition (and does not claim the bonus depreciation), the new law  increases the max depreciation allowance to $10,000 (for the first year the business places the vehicle in service), $16,000 for the second year, $9,000 for the third and $5,670 for the fourth and later years. The maximum first-year bonus depreciation allowance remains at $8,000. 
  • The new tax law limits like-kind exchanges. The TCJA eliminates like-kind exchanges for any transactions aside from real  property. Under the new law, the use of like-kind exchanges, a technique used to defer a gain on the sale of property, is limited. The new regulations will permit only like-kind exchanges of real property not primarily held for sale. In the past, tax law allowed entities to use this technique for like-kind exchanges of personal property as well. 
  • TCJA expands bonus depreciation rules. With this new  law, entities can take a 100% first-year deduction for qualified  property acquired and placed into service after September 27, 2017, and  before 2023. Under the new law, regulators expanded the type of property covered to include used properly. Prior to TCJA, the law provided for a  50% allowance on only new property. 
  • The new law places a limit on business interest deductions.  If an entity has average annual gross receipts in excess of $25 million  (averaged over three years), it will now have limited interest expense deductions. Any business with disallowed interest under this rule can carry the interest expense to the following year and forward indefinitely. The regulation limits the business interest deduction to 30% of adjusted taxable income for entities not covered by the  limitation.

Still don't fully understand all the new tax law changes?

Give us a call and we will put you in touch with the right tax professional to answer all your tax questions.