Tax Law Changes: Meals and Entertainment

One of the many changes to the tax code modifies the deductibility of meals and entertainment expenditures by businesses. The following modifications apply to tax year beginning after December 31, 2017.

Below is a list of updated provisions for meal and entertainment expenditures under the new tax law:

  • Entertainment expenses are not deductible unless specific exceptions are satisfied.
  • Office holiday parties remain 100% deductible under the new tax law.
  • Meals paid for while entertaining clients remain 50% deductible.
  • Meals provided for the convenience of the employer are reduced to 50% deductible. After 2025, these meals will no longer be deductible.
  • Expenses for meals incurred by an employee while traveling remain 50% deductible under the new law.

 

Please consult your tax advisor for specific issues regarding your personal tax situation. If you have any additional questions, please contact Brian Reed at 314.576.1350.

Hobby vs. Business Tax Treatment

In order to qualify as a business for tax purposes, an activity must be actively engaged in for profit. To determine if a taxpayer has a profit motive, the IRS looks at various factors which are often subject to judgment. It is important for a taxpayer to be able to prove they are a business, as the tax treatment is much more favorable.

If an activity is a business activity, expenses will be deductible and losses may be used to offset other income. The taxpayer can also deduct health insurance premiums and one-half of self employment tax to arrive at adjusted gross income. There will be self-employment tax paid on the earnings, but if the activity generated a loss, self-employment tax is not a factor.

If an activity is considered to be a hobby, the income will be treated as ordinary income. However, the expenses are only deductible as miscellaneous itemized deductions subject to a 2% AGI floor. In addition, any expenses in excess of the income are not deductible and will be permanently lost.

If a taxpayer truly has a profit motive, they should be sure to adequately document their business activity. The activity should have its own accounting records, including an income statement and balance sheet. The activity should have a separate bank account as the taxpayer should not co-mingle personal and business activity funds. In summary, the activity should be ran and operated the same as any other professional business.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314.576.1350 or rbischoff@bwtpcpa.com.

IRS Announces Per Diem Rates for Business Travelers

Travel expenses are deductible to the extent they are considered business expenses. The Internal Revenue Service defines business expenses as, those that are ordinary and necessary expenses of traveling away from home for your business, professions, or job.

If you are eligible for reimbursement under an employer accountable plan you can not deduct those expenses, even if you did not seek the reimbursement from your employer.

Effective October 1, 2017, you can use the link below to find the federal government per diem rates for the locality that you will be traveling to.

For more information, please contact Justin Work, CPA at 314-576-1350 or jwork@bwtpcpa.com.

https://www.gsa.gov/travel/plan-book/per-diem-rates