Major tax reform was approved by Congress in the Tax Cuts and Jobs Act (TCJA) on December 22, 2017. The IRS is working on implementing this major tax legislation that will affect both individuals and businesses. The IRS will be releasing information and guidance to taxpayers, businesses and the tax community as it becomes available.

Here are some key aspects of the changes:

BUSINESSES

• Pass-through Income Deduction – Starting in tax year 2018, there will be a new deduction for which many business entities will be eligible. The deduction will be for 20% of “qualified business income” from a partnership, S corporation, or sole proprietorship, as well as 20% of qualified real estate investment trust (REIT) dividends, qualified cooperative dividends, and qualified publicly traded partnership income. There are several exceptions and specialized rules which apply to this deduction. Here are two of the major items:

1. If the taxpayer has income above a certain threshold, a limitation on the amount of this deduction is based on the business owner’s share of W2 wages the business paid. This income threshold for phase out is between 157,500 and $207,500 for singles and $315,000 to $415,000 for married filing joint. Alternatively, capital intensive businesses may yield a higher deduction as there is a secondary, relatively complex, formula to weigh against the 20% deduction.
2. A special limitation applies to businesses defined as “special service businesses.” “Special service businesses” include any business involving the performance of services in the field of health, law, accounting, consulting, athletics, financial services and any trade or business the principal asset of which is reputation or skill of one or more of its owners. These businesses are phased out of the deduction between $157,500 to $207,500 for singles and $315,000 to $415,000 for married filing joint. Architects and engineers are specifically excluded from this limitation.

This new deduction for 20% of “qualified business income” will likely be one of the most highly utilized and beneficial deductions within the new tax bill. It is also one of the most complicated new rules and will take careful consideration to apply correctly.

Tax Reform: Meals and Entertainment Changes for Businesses in 2018

Businesses and employers need to take note of the new rules as they plan their 2018 meals and entertainment budgets. The Tax Cut and Jobs Act of 2017 (TCJA) places stricter limits on what businesses can deduct meals and entertainment expenses for clients, or its employees.

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule will now also apply to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be nondeductible. See the following tables for comparing the rules before and after the TCJA.

Employer deductions for business-related meals and entertainment under the TCJA from 2017 to 2018

Entertaining Clients: Entertainment

Employee Travel Meals

Meals Provided for Employer Convenience (ex. on-premise cafeteria)

Office Holiday Parties

*Subject to interpretation from the Internal Revenue Service. The following guide is an analysis and summary related to changes in the new law and tax rules. Be sure to consult your tax professional for your specific situation before planning policy changes.