The IRS issued guidance (October 2018) on the business expense deduction for meals and entertainment following law changes in the Tax Cuts and Jobs Act (TCJA).

The 2017 TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.  But, taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.

Prior to 2018, a business could deduct up to 50 percent of entertainment expenses directly related to the active conduct of a trade or business or, if incurred immediately before or after a bona fide business discussion, associated with the active conduct of a trade or business.

The Department of the Treasury and the IRS expect to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment. Until the proposed regulations are effective, taxpayers can rely on this guidance (see Notice 2018-76.).

Below is a synopsis of the applicable section of the 2017 Tax Reform legislation.  Note that the income level specified in the second paragraph would be your projected 2018 “Taxable Income.” For reference, see your 2017 form 1040, line 43.  Also, remember that this is income combined with your spouse, if filing jointly.

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  • Sole Proprietors, S Corporations, and Partnerships/LLCs
    The income generated by these entities flows through directly to the individual who owns the entity. Historically, the income from these entities would be taxed at the taxpayer’s individual income tax rate. As a result, the income from these entities could be taxed at rates as high as 39.6% under the current rate structure.

Under the new law, a 20% deduction on qualified business income has been established. Specific services industries, including health,              law, and professional services, are excluded from this deduction. However, married taxpayers filing jointly with income below $315,000           and other filers with income below $157,500 would be allowed to claim the deduction from these service industries. This provision is set           to expire on December 31, 2025. Please note there are several rules that have been put into place when claiming this deduction, please               consult your tax advisor for specifics.

  • “C” Corporations
    The corporate income tax rate has been permanently reduced to a maximum rate of 21% from 35% beginning in 2018. The corporate alternative minimum tax has been effectively eliminated.

Other Business Related Changes

  • The new law allows short lived capital investments to be fully expensed (through 2022), and has increased the Section 179 expensing cap from $510,000 to $1 million.
  • Net interest expense will be limited to 30% of the adjusted taxable income for entities with average gross receipts in excess of $25 million.
  • Net operating losses can no longer be carried back, and losses carried forward will be limited to 80% of taxable income.
  • The domestic production activities deduction (Section 199) has been eliminated.
  • The rules for allowing business entities to remain cash basis taxpayers have been changed, allowing for taxpayers to have higher average gross receipts and still maintain cash basis eligibility.