The new tax law places stricter limits on the deductibility of business meals and entertainment expenses. As of January 1, 2018, deductions for business-related entertainment expenses are disallowed. This repeals prior law allowing deductions for entertainment, amusement, recreation, membership dues for any club organized for business, pleasure, or recreation, and any portion of facilities in connection with any of the above.
Meal expenses incurred during business activities will remain 50% deductible. However, meals provided to employees for the convenience of the employer will now only be 50% deductible.
Disallowed employee benefits and incentives
Several other employer-provided fringe benefits were also previously deductible by the employer and tax-free to the recipient employee. However, many of these items are now disallowed or reduced under the new law. Previously, employers could deduct the cost of certain employee fringe benefits such as carpools and parking, as well as deduct the amount of employee achievement awards up to $400 per award and not to exceed $1600 for the year per employee. This has changed under the new law, and employers can no longer deduct the cost of employee parking, van pools, bus or transit cards. Additionally, to be deductible, employee achievement awards must now be tangible personal property and cannot be cash, cash equivalents, gift cards, coupons, vacations, stocks, or bonds.
Cost recovery under section 179 and bonus depreciation
There are some positive changes as well that may offer incentive for purchasing qualifying property or equipment. Under the new law, the amount a taxpayer may elect under section 179 to expense in the current tax year has doubled from $500,000 to $1,000,000. In general, the property purchased must be depreciable tangible personal property used in the active conduct of a trade or business and must be placed into service in the same tax year that the deduction is taken.
In addition, bonus depreciation increases from 50% to 100% for qualifying property acquired and placed in service after September 27, 2017 and before 2023. Percentages will reduce incrementally by 20% from 2023 through 2026.Under the new law, the asset is no longer required to be new to be eligible for 100% expensing. Used property is now eligible as long as:
- It is the taxpayer's first use of the property.
- The property is not acquired from a related party.
Please be aware that these elections may or may not be beneficial to your situation. Depending on method of purchase, financing, planned period of service, and other factors, 100% bonus depreciation may have negative effects in subsequent tax years.
Thank you all for your patience and understanding as we navigate the new tax law. We will continue to update you on the implications of the law.