The new Tax Cuts and Jobs Act made some significant changes to what employers can and cannot deduct in regards to meals and entertainment. Below is a BRIEF overview of the changes effective in 2018.
ENTERTAINMENT IS NO LONGER DEDUCTIBLE
Under the new tax law a deduction can’t be claimed for an activity generally considered to constitute entertainment, amusement or recreation, or with respect to a facility used in connected with such an activity. So that means cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, club dues, etc. are no longer deductible. It appears the meals consumed during the entertainment event are also no longer deductible but we hope for clarification from IRS on this point soon.
But there is some good news (sort of)…
Business meals are still deductible, subject to certain limitations
Business meals are deductible so long as significant business occurs immediately before, during or after a meal that is not considered lavish or extravagant. The deduction for the meal is still limited to 50% of the cost of the meal.
Costs for employee recreational or social activities such as office parties are still 100% deductible by the employer. Employee training sessions do not fall under the category of recreational or social activities and are therefore subject to the 50% limitation.
Please keep in mind this is an extremely simplified version of the new rules and as always we welcome your questions.
Partnership Income Tax Changes
Historically partnerships are not subject to income tax – income, gains, losses, deductions, or credits flow through to the partners on their respective K-1’s. However, as part of a budget agreement enacted last November, Congress has replaced the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) with the Bipartisan Budget Act of 2015 which governs the rules of partnership audits. These new rules say that any adjustments made to any items of income, gains, losses, deductions, or credits are taxed at the partnership level and the partnership is liable for any penalties or underpayments of tax at the highest rate of tax in effect for the reviewed year.
When do these new rules take effect?
The new rules take effect 1/1/2018
Can the Partnership elect out?
Yes, if the following applies:
- Partnership has less than 100 partners
- Each partner is an individual, an estate of a deceased partner, an S corporation, a C corporation, or a foreign entity that would be treated as a C corporation if it were domestic Note: a partnership that has as a partner another partnership / trust (this includes grantor trusts) or has a tax exempt organization as a partner (depending on the type of nonprofit entity) may NOT elect out of the above rules!
- An election is made with a timely filed partnership tax return
- The names and identification numbers of the partners are listed on the timely filed return
- All partners are made aware of the elections
What does this mean for you?
Talk to your business attorney about how the new rules may impact your partnership. Consider possible amendments to current partnership agreements already in place.
- Should the agreement be altered or drafted to REQUIRE an election out of the above rules if the partnership qualifies?
- Should the agreement prohibit transfers of partnership interests to persons/entities that would prohibit/terminate the election out?
- Who in the partnership will be the tax representative (partner in charge of coordinating and dealing with tax matters) and how will that person be determined?
If you have any questions feel free to reach out to us or stop by our office.
– Jan and Team.
Document dated 7/12/2017