Year End Tax Planning: Disappearing Deductions

The Tax Cuts and Jobs Act (TCJA) introduced many favorable tax changes for businesses – everything from a drop in the corporate tax rate to a flat 21 percent to more substantial write-offs for business equipment. While these additions have certainly stolen the spotlight, taxpayers shouldn’t overlook the deductions that were eliminated as a result of the new tax law.

Business Meal and Entertainment Expenses

Prior to TCJA, businesses were able to deduct 50 percent of the cost of entertaining clients, customers, and others associated with a trade or business. This included tickets to sporting events, theaters, concerts, and charitable events. Beginning January 1, 2018, this deduction no longer exists. Taxpayers can no longer write-off entertainment costs, regardless of any connection to a business.

Almost immediately after TCJA was passed, taxpayers requested clarification regarding how the repeal of the entertainment deduction would affect business meal expenses. Business meal expenses will remain 50 percent deductible assuming:

  • The taxpayer was present at the time of the expenditure
  • The meals were not lavish or extravagant

Consistent with the prior law, business meals provided to internal employees are also 50 percent deductible. This may include employee travel and working meals. Certain meal write-offs will only remain 50% deductible until 2025, at which point the deduction will be eliminated entirely. This includes meals served at an employer-operated eating facility and on-site meals provided by the employer to the employee for the convenience of the employer.   

Business Interest Expenses

Before 2018, taxpayers were able to deduct business interest – the cost of interest that is charged on business loans used to maintain operations – with few limitations. After TCJA, the deduction for net business interest expenses is limited to 30 percent of a taxpayer’s adjusted taxable income.

Small businesses – in this case, companies with average annual gross receipts of $25 million or less over a three-year period – are exempt from the new business interest regulations.  

Net Operating Losses

Before TCJA went into effect, a business’s net operating losses (NOLs) could generally be carried back two years and carried forward 20 years to offset taxable income. The new law repealed the two-year carryback allowance completely and placed limitations on the use of NOLs as a method for curtailing tax liability.

Prior to TCJA, a business could use its NOLs to offset all of their taxable income in subsequent years – potentially reducing their tax liability to zero. Now, the NOL deduction is limited to 80% of taxable income. 

Fringe Benefits

TCJA made several changes to the taxability and deductibility to employee fringe benefits. Until now, most of the expenses outlined below were 100 percent deductible and could be excluded from the employer’s income.

  • Moving Expenses: Employee expenses incurred by moving themselves and their personal belongings from their former residence to their new residence are no longer deductible, regardless of whether the employer reimburses the employee for the moving costs or pays for them directly.
  • Transportation/Commuting Expenses: An employer can no longer deduct the cost of employee transit passes, qualified parking, qualified bicycle commuting, or transportation to/from work in a commuter highway vehicle.
  • Employee Achievement Awards: While employers are still permitted to present and deduct employee achievement awards in the form of tangible personal property to their employees, TCJA has clarified that “tangible personal property” does not include:
    • Cash, cash equivalents, gift cards, gift coupons, or gift certificates
    • Vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items

Note that if an employer opts to treat the moving, transportation, and commuter fringe benefits as taxable W-2 wages, the employer can deduct the expenses on their return.  

While the IRS has yet to provide guidance on several sections of the new tax code, the new rules can still have a profound impact on the taxable income of your business. Be sure to consult with an experienced tax advisor to ensure correct application of the regulations on your future returns.