Tax reform imposed limitations on food, beverage and entertainment expenses. Expenses considered entertainment are not deductible at all during the years 2018 through 2025. The tax reform act also imposed a number of restrictions on food and beverage expenses as explained in this week’s article. Learn more….
In the past, the business use of a vehicle was determined either by using the standard mileage rate for business or using actual expenses plus vehicle depreciation limited by the luxury auto caps. That continues to be the case, except the luxury auto depreciation limit has been substantially increased. In addition, there are other changes as detailed below.
Standard Mileage Rates – The standard mileage rates for the business use of a car (or a van, pickup, or panel truck) are:
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STANDARD MILEAGE RATES FOR BUSINESS
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2017
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2018
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53.5 Cents Per Mile
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54.5 Cents Per Mile
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Taxpayers with higher 1040 taxable incomes who are self-employed but are not “specified service businesses” may find it beneficial to structure new businesses, or restructure an existing business, as an S corporation to avoid taxable income limitations that apply to the new 20% Sec. 199A pass-through deduction.
To make up for the tax reform’s reduction of the C corporation tax rate to 21%, from which other forms of business activities do not benefit, Congress created a new deduction and code section: 199A. The 199A deduction is for taxpayers with other business activities – such as sole proprietorships, rentals, partnerships and S corporations – since, unlike C corporations, which are directly taxed on their profits, the income from the other business activities flows through to the owner’s tax return and is taxed at the individual level, i.e., at the individual’s tax rate, which can be as high as 37%.
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Not all provisions of the Tax Cuts and Jobs Act are beneficial to taxpayers. One notable negative provision is the suspension of the deduction for employee business expenses. Under prior law, taxpayers who were employees were able to deduct expenses related to their employment as a miscellaneous itemized deduction, to the extent the expenses exceeded 2% of their adjusted gross income. Yet, under the tax reform, employee business expenses will not be allowed for tax years 2018 through 2025.
However, this new limitation does not apply to individuals who are self-employed. For this group of taxpayers, expenses such as business use of their personal vehicle, business-related travel, work-related education, and use of a qualified home office for business continue to be tax-deductible on their business schedules. Furthermore, tax reform actually provides them with more liberal expensing options and, for some, even a special deduction of 20% of qualified business income.
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If you are an employee (i.e., a W-2 wage earner) with substantial work-related business expenses, the Act was not kind to you. It suspended (and effectively repealed), for 2018 through 2025, all miscellaneous itemized deductions, which were previously only subject to a floor of 2% of adjusted gross income (AGI). Employee business expenses are included in that category of miscellaneous itemized deductions.
This change affects those who are compensated as employees and who have work-related expenses—including salespeople with travel and entertainment expenses, long-haul truck drivers with away-from-home expenses, mechanics with tool expenses, and any other employees with large but unreimbursed business expenses. These employees, beginning in 2018, will no longer be able to count such expenses as itemized deductions.
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One major difference between being an employee and being self-employed is how you deduct the expenses you incur related to your work. A self-employed individual is able to deduct expenses on his or her business schedule, while an employee is generally limited to deducting them as itemized deductions.
That means self-employed individuals benefit by deducting their expenses directly on their business schedule, which can then result in a reportable business loss if the expenses exceed their business income.
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Tax legislation passed late in December 2015 (the Protecting Americans from Tax Hikes Act) extended a number of favorable business provisions and made some others permanent. The provisions can have a significant impact on a business’s taxes for 2016. Here is a rundown of those changes that need to be considered when preparing your 2016 and 2017 returns.