The new tax reform legislation has resulted in many changes to various commonly used business deductions. Some of these changes merely alter current deductions, and some eliminate previously existing deductions. The impact of these changes sometimes will vary greatly depending on the type of business and industry. Each business will need to understand, examine and review the application of these rules specifically for their circumstances.
Bonus depreciation was first introduced in March 2002. At that time Congress provided an immediate 30% deduction for specific types of new property. The equipment had to be new, first use property with a useful life of fewer than 20 years. This definition covered almost all types of equipment and tangible personal property. Property excluded from this definition included real estate and real estate improvements. The new tax reform law again expanded bonus depreciation. The initial first-year bonus depreciation rules now allow for 100% expensing of qualified property, and it includes used property. See details below for additional information and timing.
For many years, most meals and entertainment costs were limited to a maximum tax deduction of 50% making these expenses commonplace in the business world. The definition of meals and entertainment included expenses such as business lunches and dinners, meals for employees working late, event tickets and other items. Now, however, the new tax reform law has tightened the amount of these expenses that can be deducted. These changes may cause you to rethink the purchase of those football tickets or employee meals, because the tax consequences may override the business benefits going forward.
In addition to changes to meal deduction, the tax reform bill also took away another deduction and employee-friendly fringe benefit. The new law eliminates the deduction for employer-provided transportation costs. Employers have long paid for parking and other forms of travel for their employees to help them offset the cost of commuting to the workplace. Consequently, this eliminated deduction creates an interesting dilemma for employers. Will employers continue to cover the cost with no tax deduction? Instead, will they increase employee wages, which provides a business deduction?
To find out more information about other aspects of the new tax reform law, please continue to check back to our website.
Bonus Depreciation and Full Expensing
Under current section 168(k), an allowance for 50 percent “bonus” depreciation gives businesses an immediate deduction for half the purchase price of certain qualified property in addition to the first year tax depreciation expense (calculated after the reduction by 50 percent). The House bill proposed an increase of the first year allowance to 100 percent, allowing taxpayers the ability to deduct the full cost of qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023. The House bill also proposed expanding property treated as qualifying to include used property not used by the taxpayer before acquiring it. The Senate bill proposed full expensing for property placed in service after September 27, 2017, and before January 1, 2023, (2024 for property with longer production periods) with the percentage decreasing by 20 percent for each successive year beginning in 2023 (80 percent allowance in 2023, 60 percent allowance in 2024, etc.) through a total phase out of the allowance for property placed in service on or after January 1, 2027. The new law adopted the Senate proposal and also allows the election for 50 percent bonus depreciation in lieu of the 100 percent available, and repeals the election to claim prior year minimum tax credits in lieu of bonus depreciation. Importantly, the new law expands the definition of qualified property by eliminating the requirement that use of the qualified property commence with the taxpayer.
Section 179 allows a deduction for the full purchase price of certain qualifying property purchased in the tax year. For tax years beginning in 2017, the section 179 deduction is limited at $510,000, and begins to be reduced dollar-for-dollar when equipment purchases exceed $2,030,000. The House bill proposed for tax years beginning in 2018 through 2022 the expense limitation be increased to $5,000,000, and the phase out amount to $20,000,000. The Senate bill proposed the expense limitation be increased to $1,000,000, and the phase out amount to $2,500,000. The Conference Committee report and new law adopts the Senate approach, increasing the section 179 expense limitation on qualifying property to $1,000,000, while also increasing the initial phase out amount to $2,500,000.
As noted above, the expansion of both bonus depreciation and section 179 may increase or accelerate the generation of NOLs. The election to use such deductions will depend on the specific context and whether or not the acceleration will generate an 80 percent limited NOL. Further, the expansion of “qualified” property may increase the desire of buyers to purchase assets as opposed to stock in scenarios where the result is a step up in tax basis based on purchase price which can then be immediately deducted. For the same reason, there may also be an increase in deemed asset sale elections under sections 336(e), 338(g), and 338(h)(10) in scenarios where the structure of the acquisition is a qualified stock disposition or purchase.
In general, the new tax Act provides for stricter limits on the deductibility of business meals and entertainment expenses. Under the Act entertainment expenses incurred or paid after December 31, 2017 are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees”. (i.e. office holiday parties are still deductible). Business meals provided for the convenience of the employer are now only 50% deductible whereas before the Act they were fully deductible. Barring further action by Congress those meals will be nondeductible after 2025.
Businesses should keep the new rules in mind as they plan their 2018 meals and entertainment budgets. See below for a chart comparing the rules before and after the Act.
Limitation of deduction by employers of expenses for entertainment and certain fringe benefits
The new law repeals deductions for entertainment, amusement, and recreation when
directly related to the conduct of a taxpayer’s trade or business. The new law provides
that no deduction is allowed for (1) an activity considered entertainment, amusement, or
recreation, (2) membership dues for any club organized for business, pleasure,
recreation, or other social purposes, or (3) a facility or portion of a facility used in
connection with any of the above.
The new law generally retains the 50% deduction for food and beverage expenses
associated with a trade or business, effective for amounts paid or incurred after December
31, 2017. The new law also applies the 50% limitation to certain meals provided by an
employer that are currently 100% deductible. The expanded 50% limit applies to food and
beverages provided to employees as de minimis fringe benefits, to meals provided at an
eating facility that meets the requirements for an on-premises dining facility, and to meals
provided on-premises to employees under section 119 for the convenience of the
employer. The 50% deduction limit applies for years after 2017 and before 2026. The on premises
meals and section 119 meals expenses would be nondeductible after 2025.
The new law disallows any deduction expenses associated with providing qualified
transportation fringe and any expense to provide transportation for commuting between
the employee’s residence and place of employment (unless ensuring the safety of an
employee). This includes van pools, subway or transit cards, and qualified parking
Joint Committee on Taxation has estimated this provision will increase revenue over 10 years by approximately
$23.5 billion for meals and entertainment expenses and $17.7 billion for qualified