Entertainment Deductions Have New Rules Under Tax Reform
Employee Tax Reform Note
Tax Reform made changes to business entertainment deductions, for you, the business owner. This is one of a series of articles explaining how the various tax changes in the GOP’s Tax Cuts & Jobs Act affects you. “The Act” for purposes in this article, went through in late December of 2017. It could affect you and your family, both in 2018 and future years. This series of articles offers strategies that you can employ to reduce your tax liability under the new law.
Miscellaneous Itemized Deductions Subject to the 2% AGI Floor
So, are you are an employee? In other words, did you fill out a w-2 form? Do you have substantial business expenses? Well, unfortunately, the Tax Cuts & Jobs Act was not kind to you. For 2018 through 2025, all miscellaneous itemized deductions, was repealed. Here, let me explain it this way. Previously, miscellaneous itemized deductions were only subject to a floor of 2% of adjusted gross income (AGI). That was suspended. Basically, employee business expenses are included in that category of miscellaneous itemized deductions.
Employee Business Expenses
This change affects those who receive compensation as employees and who have work-related expenses. Beginning in 2018, the following business professionals will no longer be able to count these expense examples as itemized deductions:
- Salespeople with travel and entertainment expenses,
- Long-haul truck drivers with away-from-home expenses,
- Mechanics with tool expenses,
- Teacher supplies, and
- Any other employees with large but non-reimbursable business expenses.
Will this change hurt you? Well, that depends. Because employee business expenses could previously only be deducted to the extent that they exceeded 2% of AGI. Therefore, the effects of the Act will depend upon the extent of your expenses. Another consideration is whether your total itemized deductions would have exceeded the new standard deduction, which has increased for 2018.
Employee Reimbursement Plan (Accountable Plan)
Don’t get too upset about business entertainment deductions. As a remedy, you may want to contact your employer and try to negotiate an “accountable plan.” What is an accountable plan, you wonder? It is a business-expense reimbursement plan where an employer can reimburse the employee, for business expenses, tax free! With this arrangement, you would need to prove your business expenses to your employer. You would also need to return any reimbursements that your employer pays in excess of the proven amount. So anything you receive over and above a valid reimbursement, you need to return that money within a specific time frame.
Do you have questions about entertainment deductions for your business?
If you have questions related to the loss of this deduction or about how the change will impact your specific tax situation, feel free to give Alex Franch, BS EA a call at 781.849.7200 or email us at firstname.lastname@example.org. Better yet, if you are a new business or an entrepreneur contemplating starting a business, why not make an appointment to develop a business tax strategy?
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.