THE NEW TAX REFORM LAW TAKES A BITE OUT OF MEALS, ENTERTAINMENT, AND TRANSPORTATION DEDUCTIONS
By Jay M. Rubinstein
The Tax Cuts and Jobs Act, (TCJA), although being pro-business in many respects, limits the deductibility of meals, entertainment, and transportation expenses. In the past, taxpayers could deduct 50% of expenses for business related meals and entertainment. But under the new law, many clients are asking questions regarding these new limitations. We have simplified the changes so you and your business can have a quick guide to understanding the new law and how these deductions can help you manage the cost and deductibility of these expenses.
Prior to 2018, the entertainment strategy of a business was to give the customer/prospect a good time and 50% of the cost of event tickets or other entertainment could be deducted. A charitable event cost was 100% deductible. But no longer; the TCJA has repealed the deduction for all client/prospect related entertainment or amusement activities. No more deductions for sporting events, nightclubs, or sunset boat rides.
But there is good news for deducting one aspect of customer/prospect entertainment: the reasonable cost of a business related meal is still 50% deductible. I recommend that the meal be in a food venue such as a restaurant. Meal or food expenses that are incurred at a club or event will likely be disallowed by the IRS as being an entertainment expense, which is no longer deductible, rather than a “meal” expense which is still 50% deductible.
TAKING CARE OF BUSINESS-EMPLOYEE MEALS…
Meals provided for the employer’s convenience remain 50% deductible through 2025. In 2026 they become nondeductible. This 50% deduction applies to all snacks, beverages, and other food items. Office parties when everyone is invited remains 100% deductible. It seems the cost of a party for a group of employees is also still deductible at 100%. This would be when an entire department has a party for achieving a goal for example, but the cost of a meal brought in for just managers only would be deductible at only 50% since everyone in the group was not participating. All employee meal expenses while traveling remain 50% deductible.
EMPLOYEE TRANSPORTATION PERKS…
Employee transportation benefits for parking, transit passes, and bike commuting were deductible. These expenses are no longer deductible for travel between the employee’s home and workplace, with two exceptions: transportation considered necessary for the employee’s safety and for bike commuters who can be reimbursed up to $20 per month. Note that if your business still reimburses transportation costs, employees can still exclude these benefits from income.
THE AWARD FOR THE EMPLOYEE OF THE MONTH GOES TO… Previously employee awards of up to $400 per award or $1,600 per year were fully deductible and not taxable to the employee. Under TCJA, the dollar limits remain the same and the employee does not have to declare the award, but cash, gift cards, certificates, vouchers, stocks/bonds, lodging, and coupons are not deductible by the employer. To be deductible the award must be tangible goods.
Here is a quick reference recap of the new law as it relates to meals and entertainment:
EXPENSE / DEDUCTIBLE
Entertainment expenses at an event, club, or social venue / NO
Meals with customers/prospects involving business topics at a restaurant / 50%
On premise meals, snacks, or beverages for convenience of employer / 50%
Meals for traveling employees / 50%
Company social events such as a holiday party or summer BBQ / 100%
Jay M. Rubinstein, J.D., M.B.A., is a senior tax manager at LLG with 30+ years experience in federal and state taxation. If you have any questions, please contact him at 847-205-5420 or [email protected]
SOUTH DAKOTA V WAYFAIR INC.
A VERY IMPORTANT DECISION FOR YOUR BUSINESS AFFECTING STATE SALES TAX AND STATE INCOME TAX
On June 21, 2018 the Supreme Court rendered a decision with far reaching and substantial implications for many businesses. The purpose of this communication is to inform you of the importance of this decision and to encourage you to contact us to discuss how this decision could affect your business and operations.
In Quill Corp. v. North Dakota (“Quill”), the U.S. Supreme Court held that a state could not require a seller to collect and remit sales tax in a state unless the taxpayer had a physical presence in the state. Since that decision, businesses have generally understood that they were not required to collect and remit sales tax in another state unless they had a physical presence in the state.
In 2016, South Dakota directly challenged the Quill decision by enacting a law requiring remote sellers (sellers without a physical presence in the state) to collect and remit sales tax to the state if the seller had sales exceeding $100,000, or 200 separate sales transactions, with South Dakota customers.
On June 21, 2018 the U.S. Supreme Court overturned Quill in South Dakota v. Wayfair, Inc.(“Wayfair”), concluding that “the physical presence rule of Quill was unsound and incorrect. In doing so, the Supreme Court struck down the physical presence standard to create state sales tax nexus and instead, established economic nexus as the new standard.
The U.S. Supreme Court remanded the case to a lower court in order to determine if the South Dakota law is constitutional. In its decision, the U.S. Supreme Court cited several factors that appeared to support the constitutionality of the law.
Currently, more than 20 states have enacted similar legislation and more states are expected to follow. Under these laws, remote sellers are required to collect sales tax (or comply with use tax notification requirements) in a state if their business, measured by either sales volume and/or the number of sales transactions, exceeds certain minimum thresholds. The precise thresholds and effective dates of these laws vary from state to state. These laws are likely to face court challenges to determine if they are constitutional.
Further adding to the compliance complexity, many states have enacted and other states are likely to enact economic nexus standards for state income tax, not just sales/use tax.So physical presence is no longer the nexus standard when evaluating whether or not a business should collect and remit sales tax to a specific state, and it is important that you understand this important concept.
This represents a seismic change in nexus standards for sales, use and income tax purposes. Previously issued guidance related to state filing obligations for sales, use and income taxes may no longer be appropriate in view of the 2018 U.S. Supreme Court decision. The Wayfairdecision may require your business to register, collect and remit sales tax in additional states and file state income taxes in additional states.
We strongly encourage you to contact us to discuss your specific situation.
Click on the link below to see a chart of the key individual tax provisions of the Tax Cuts and Jobs Act of 2017, which include the item, effective date, new law and before the law change:
To Our Clients and Friends
Over the past several months, we’ve digested the many tax law changes brought by the Tax Cuts and Jobs Act (TCJA). These changes bring a host of uncertainties as well as planning opportunities. From lower tax rates to a new deduction for pass-through income, the new tax law may mean more cash in your pocket. This letter presents some tax planning ideas under the TCJA for you to think about this summer while there’s sufficient time left in 2018 to take tax-saving actions. Some of the ideas may apply to you, some to family members, and others to your business.
Take Advantage of Lower Tax Rates and Investment Gains
Under the TCJA, 2018 ordinary tax rates are generally lower than those for 2017. For example, the top rate has been reduced from 39.6% to 37%. The remaining six rates are 10%, 12%, 22%, 24%, 32%, and 35%. Also, the top rate now applies to joint filers whose taxable income is over $600,000 (as opposed to $470,700 for 2017). Some taxpayers who were taxed at 39.6% in 2017 may now find themselves in the 35% tax bracket.
In other good news, the TCJA didn’t change the capital gains rate structure. Therefore, most categories of long-term capital gain are taxed at 0%, 15%, or 20%. The maximum 20% rate applies to joint filers with 2018 taxable income (including long-term gains) above $479,000. Higher income individuals also can be hit with the 3.8% Net Investment Income Tax (NIIT). The bottom line is that taxpayers falling outside of the top ordinary tax bracket of 37% can be subject to the maximum capital gains rate of 20%.
As you evaluate investments held in your taxable brokerage firm accounts, consider the tax impact of selling appreciated securities (currently worth more than you paid for them) before the end of this year. For most taxpayers, the tax rate on long-term capital gains is still much lower than the rate on short-term gains. Therefore, it often makes sense to hold appreciated securities for at least a year and a day before selling to qualify for the lower long-term gain tax rate.
Also, taxpayers who expect to be subject to a higher capital gain rate after 2018 should consider selling profitable long-term investments in 2018 to take advantage of this year’s rate. The proceeds and tax savings could be used to help fund a traditional IRA (possibly deductible) or Roth IRA to postpone or eliminate future taxes.
New Standard Deduction versus Itemized Deductions
For 2018, joint filers can enjoy a standard deduction of $24,000 (versus $12,700 for 2017). The new standard deduction for heads of household is $18,000, and single taxpayers (including married taxpayers filing separately) can claim a standard deduction of $12,000. However, the TCJA suspends the deduction for personal exemptions.
If you typically claim the standard deduction (as opposed to itemizing deductions), chances are your tax bill will decrease for 2018. Although personal exemption deductions are no longer available, a larger standard deduction, combined with lower tax rates and an increased child tax credit (see below), may result in less taxes. However, if you usually itemize deductions, the larger standard deduction may change this. Also, the TCJA eliminates or limits many of the itemized deductions. We are available to analyze your particular tax situation to determine if you will pay more or less under the TCJA.
Note: Depending on your circumstances, we may need to adjust your estimated quarterly tax payments. Also, this is a good time to check if you’re on track to have the right amount of federal income tax withheld from your paychecks in 2018.You can correct any discrepancies by turning in a new Form W-4 (Employee’s Withholding Allowance Certificate) to your employer.
Maximize Home Mortgage Interest Deductions
Before the TCJA, taxpayers could deduct interest paid on up to $1 million ($500,000 if married filing separately) of home acquisition debt (debt used to buy or substantially improve a first or second home). Also, taxpayers could deduct interest paid on up to $100,000 ($50,000 if married filing separately) of home equity debt, regardless of how the proceeds were used. The TCJA cuts back those numbers significantly.
For 2018-2025, the TCJA reduces the limit on home acquisition debt to $750,000. For married taxpayers filing separately, the debt limit is halved to $375,000. Also, the TCJA generally disallows home equity debt interest. However, the IRS recently advised homeowners that interest paid on home equity loans and lines of credit may be deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. In other words, such loans will be treated as home acquisition debt subject to the new $750,000/$375,000 limits.
Thanks to a set of grandfather rules, the new limits don’t apply to home acquisition debt that was taken out on or before 12/15/17 (or taken out on or before that date and refinanced later). This is good news for existing homeowners. However, if you have a home equity loan or line of credit, we will need to trace how the proceeds were used to determine if the interest is still deductible under the new law.
Take Advantage of the New Child Tax Credit
Under pre-TCJA law, the child tax credit was $1,000 per qualifying child, but it was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their Adjusted Gross Income (AGI) exceeded $110,000. (The threshold was $55,000 for married couples filing separately and $75,000 for unmarried taxpayers.)
Starting in 2018, the TCJA doubles the child tax credit to $2,000 per qualifying child under age 17. It also allows a new $500 credit (per dependent) for any of your dependents who aren’t qualifying children under l7. There is no age limit for the $500 credit, but the tax tests for dependency must be met.
The TCJA also substantially increases the “phase-out” thresholds for the credit. Starting in 2018, the total credit amount allowed for a married couple filing jointly is reduced by $50 for every $1,000 (or part of $1,000) by which their AGI exceeds $400,000. The threshold is $200,000 for all other taxpayers. So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit.
Bunch Charitable Contributions through Donor-Advised Funds
The TCJA temporarily increases the limit on cash contributions to public charities and certain private foundations from 50% to 60% of AGI. However, as we mentioned earlier, the standard deduction has almost doubled. Combined with the capping of the state and local tax deduction at $10,000 per year ($5,000 for a married taxpayer filing a separate return), changes to the home mortgage interest deduction, and the elimination of miscellaneous itemized deductions, it’s likely that fewer taxpayers will be itemizing in 2018.
One way to combat this is to bunch or increase charitable contributions in alternating years. This may be accomplished by donating to donoradvised funds. Also known as charitable gift funds or philanthropic funds, donor-advised funds allow donors to make a charitable contribution to a specific public charity or community foundation that uses the assets to establish a separate fund. Taxpayers can claim the charitable tax deduction in the year they fund the donor-advised fund and schedule grants over the next two years or other multiyear periods. This strategy provides a tax deduction when the donor is at a higher marginal tax rate while actual payouts from the account can be deferred until later. If you have questions or want more information on donor-advised funds, please give us a call. We welcome the opportunity to help you put together a charitable giving plan that suits your goals.
Revisit Your Qualified Tuition Plans
Although the details of Qualified Tuition Plans (QTPs) can vary widely, they generally allow parents and grandparents to set up college accounts for children and grandchildren before they reach college age. Once established, QTPs qualify for favorable federal (and often state) tax benefits, which can ease the financial burden of paying for college. QTPs may be particularly attractive to higher income parents and grandparents because there are no AGI-based limits on who can contribute to these plans.
Under pre-TCJA law, the earnings on funds in a QTP could be withdrawn tax-free only if used for qualified higher education at eligible schools. Eligible schools included colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. Thanks to the TCJA, qualified higher education expenses now include tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year. So, you may want to revisit your QTPs if you have children or grandchildren who attend elementary or secondary schools.
Watch out for New Alimony Rules
Under the TCJA, certain future alimony payments will no longer be deductible by the payer. Also, alimony will no longer be considered income to the recipient. Therefore, for divorces and legal separations that are executed (that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.
It’s important to emphasize that pre-TCJA rules apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019. However, under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient. If you’re considering a divorce or separation (or modification of an existing divorce decree), please let us know so we can determine the tax consequences.
Consider Investing in Qualified Opportunity Zones
Tucked away in the TCJA is the creation of Qualified Opportunity Zones (QO Zones). These are low-income communities that meet certain requirements. Investing in QO Zones can result in two major tax breaks: (1) temporary deferral of gain from the sale of property and (2) permanent exclusion of post-acquisition capital gains on the disposition of investments in QO Zones held for ten years.
The IRS has already announced the designation of QO Zones in over 20 states and U.S. possessions. It will make future designations as submissions by states are received and certified. The IRS also plans to issue additional information on QO Zones in the future. If you’re looking to defer taxable gains while revitalizing low-income communities, QO Zones may be the way to go.
Monitor State Response to Tax Reform
States react differently to changes in federal tax law. For example, some states automatically conform to federal tax law as soon as legislation is passed. Other states require their legislatures to adopt federal tax law as of a fixed date. This generally occurs on an annual basis. There are some states, however, that pick and choose which federal provisions to adopt. Because of this, your state income tax rules may be drastically different than the federal income tax rules. For example, you may be better off claiming the standard deduction for federal tax purposes but itemizing for state income tax purposes. We have monitored your state’s response to the TCJA and will help you minimize your state income tax bill.
Beware of the Alternative Minimum Tax
As tax reform efforts progressed late last year, there were high hopes that the Individual Alternative Minimum Tax (AMT) would be repealed. Unfortunately, it still exists under the TCJA. The good news is that you are allowed a relatively generous AMT exemption, which is deducted in calculating your AMT Income. The TCJA significantly increases the AMT exemptions for 2018-2025. The exemption is phased out when your AMT income surpasses the applicable threshold, but the TCJA greatly increases those thresholds for 2018-2025. This means that less people will be subject to the AMT rules.
Maximize Your Qualified Business Income Deduction
You may have heard a lot of talk in the news about a new deduction for “pass-through” income, but it’s actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities such as partnerships, LLCs, and S corporations. Under the TCJA, individuals may deduct up to 20% of their qualified business income; however, the deduction is subject to various rules and limitations.
Although there is some uncertainty surrounding this new deduction, there are some planning strategies we can consider. For example, there are ways to adjust your business’s W-2 wages to maximize your qualified business income deduction. Also, it may be helpful to convert your independent contractors to employees, assuming the benefit of the deduction outweighs the increased payroll tax burden. Other planning strategies include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. We will work with you to determine which strategies produce the best outcome.
For Business Clients
The changes affecting business clients, especially S.199A which introduces the new pass through qualified business income deduction, are complex and very far reaching. Many of the concepts are so new and require such substantial interpretation that Congress has asked the IRS to issue regulations covering these matters. The IRS intends to release those regulations in July. Once those are released we will issue another bulletin covering those matters.
As we said at the beginning, this letter is to get you thinking about tax planning moves for the rest of the year. This year is definitely unique given the numerous tax law changes brought by the TCJA. Even with uncertainty about some of the TCJA’s provisions, there are things you can do to improve your situation. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.
Lipschultz, Levin & Gray, LLC
FEBRUARY 18, 1930 – MAY 18, 2018
On Friday May 18, 2018 Seymour (“Sy”) Levin passed away at the age of 88.
Lipschultz Levin & Gray, LLC proudly bears Seymour’s name as one of its founding partners. We extend our deepest condolences to his two children: Gene (who is himself a member of the LLG team) and Julie, and to their spouses Amy and Robert, to all Seymour’s grandchildren and the entire Levin family.
Seymour was a wonderful and devoted family man, an accomplished athlete, an attorney, and a veteran of the Korean War, but I want you all to know that Seymour was also exceptional in his business life, a very fine accountant and trusted business advisor. He had an insightful mind, able to pierce through complexity to get at the root of a problem and the required solution.
He had two crucially important traits that cannot be learnt or feigned:
Firstly, he was calm and consistent. From time to time matters can get pretty intense in an accounting firm. We are dealing with peoples’ finances, their net worth, their income, their businesses, their livelihoods. Matters sometimes get heated. Seymour dealt with all the challenging events that a career in public accounting requires in a calm, thoughtful, respectful and relaxed way. He thought through issues with a clarity and sense of purpose that others can only hope to achieve and he delivered his advice in clear practical terms. He made it look easy, but it’s not. That consistency and level headedness was apparent out of the office too – on the golf course every shot went straight up the middle, maddeningly so if he wasn’t on your team. On the tennis court every shot had precision. At the bridge table his concentration and focus was complete.
Secondly, Seymour was authentic and humble. The Seymour Levin we saw in the office was the same man with his family, or on the golf course or the tennis court or seated at the bridge table. There was no arrogance, none at all, though someone with his skills could easily have been forgiven the odd display. There was never ever the slightest hint of ego, or conceit or rudeness or abruptness.
Seymour Levin was a good and gracious man and we are humbled to have known and worked with him. Seymour was more than a gentleman, he was a gentle man. We will deeply miss seeing him around our office.
We lost a good one on Friday, May 18. May his dear soul rest in peace.
William H. Finestone, Managing Partner
We are proud and pleased to announce that Lipschultz Levin & Gray, LLC (“LLG”) has been named as one of the 2018 Best Places to Work in Illinois.
This award reflects and acknowledges our continued commitment to foster an environment that encourages mutual respect and teamwork in the workplace.
The awards program began in 2006 and is promoted by The Daily Herald Business Ledger in partnership with the Human Resources Management Association of Chicago (HRMAC), the Illinois Chamber of Commerce, MRA-The Management Association, the Small Business Advocacy Council and Best Companies Group.
This statewide survey and awards program was designed to identify, recognize and honor the best places of employment in Illinois, benefiting the state’s economy, workforce and businesses. The 2018 Best Places to Work in Illinois list is made up of 30 companies in the small employer category (15-99 U.S. employees), 24 companies in the medium employer category (100-499 U.S. employees), and 21 companies in the large employer category (500 or more U.S. employees).
LLG has been named one of the Best Places to Work in Illinois in the small business category. The following logo recognizing this designation has been added to our website.
To be considered for participation, companies had to fulfill the following eligibility requirements:
– Have at least 15 employees working in Illinois;
– Be a for-profit or not-for-profit business or government entity;
– Be a publicly or privately held business;
– Have a facility in the state of Illinois; and
– Be in business a minimum of one year.
Companies from across the state entered the two-part process to determine the Best Places to Work in Illinois. The first part consisted of evaluating each nominated company’s workplace policies, practices, and demographics. This part of the process was worth approximately 25% of the total evaluation. The second part consisted of an employee survey to measure the employee experience. This part of the process was worth approximately 75% of the total evaluation. The combined scores determined the top companies and the final ranking. Best Companies Group managed the overall registration and survey process in Illinois and also analyzed the data and used their expertise to determine the final rankings.
LLG was recognized and honored at the Best Places to Work in Illinois awards ceremony coordinated by The Daily Herald Business Ledger on May 17 and will be profiled in a special publication. For more information on the Best Places to Work in Illinois program, visit www.BestPlacestoWorkinIL.com.