An Inside Look at the Tax Cuts and Jobs Act

A stack of papers and receipts on a desk next to a calculator and pen

If you own a business, you will want to pay close attention to the Tax Cuts and Jobs Act (TCJA) of 2017. This act, effective for taxable years beginning after December 31, 2017, affects the financials of business owners and their companies. To make TCJA a bit easier to digest, we want to focus on three new additions to the act involving tax deductions, corporate meals and entertainment.

Tax Deductions

Code Section 199A of TCJA details a potential tax deduction for sole proprietors and owners of flow-through entities. What exactly does that mean? Let’s break it down.

Section 199A allows business owners and “personal service providers” (we’ll come back to this later) to receive up to a 20 percent deduction on the income from their business. However, many business owners will receive less than this due to certain limitations.

The threshold ranges for the deduction are $315,000-$415,000 for married couples and $157,500-$207,500 for others. Because of these restrictions, three possible categories have emerged for business owners.

  • Personal service providers whose taxable income surpasses the range of eligibility for the deduction
    • People in this category will be phased out of the deduction depending on their income.
    • Once people in this category hit the minimum of the threshold ranges, their deduction benefit will be proportionally phased out. However, when earning more than the maximum threshold, people in this category will no longer be eligible for this tax deduction.
  • Taxpayers who are not personal service providers but whose income exceeds the threshold for the deduction
    • People in this category will not be phased out of a deduction.
    • They may be subject to different limitations based on amount of W-2 wages paid to employees or the amount of assets owned.
  • Taxpayers whose taxable incomes fall below the threshold for the deduction
    • People in this category will not be phased out of the deduction and have the best chance of benefitting from it.

One issue these categories bring to light is how to distinguish a “personal service provider.” Essentially, TCJA defines a personal service provider as one whose primary asset is the skill of its employees or one that performs services in the following fields:

  • Health
  • Law
  • Accounting
  • Consulting
  • Investing and investment management
  • Security
  • Financial and brokerage services

Notably missing from this list? The performance of engineering and architecture services.

Corporate Meals

Another part of TCJA addresses meals purchased for company purposes.

According to the act, company holiday parties and picnics remain 100 percent tax deductible. However, all other meals for company purposes are only 50 percent deductible. This may include, for example, a monthly company breakfast or a complimentary lunch provided during a meeting.

One little tip regarding company meals: if you register that welcome lunch for your new hire as a party or picnic, it suddenly becomes 100 percent deductible.

Entertainment

Perhaps the most disappointing part of TCJA for many business owners involves entertainment.

According to the act, entertainment utilized for company purposes is no longer tax deductible. This includes, but is not limited to, the following:

  • Concert/show tickets
  • Sporting events
  • Golf trips

This update might especially interest business owners who take clients out to shows or games. Unfortunately, these opportunities to schmooze are no longer tax deductible.

Keep these changes in mind when you begin to think about your end-of-year taxes. Since many company expenses like meals and entertainment will not earn you a deduction, your taxable income will likely increase. It is crucial to speak to your tax accountant before year end; after this point, no changes will be possible to help you take advantage of these deductions.

If you are still having trouble deciphering the logistics of the Tax Cuts and Jobs Act (or how they apply to your company), reach out to the knowledgeable tax professionals at Halt, Buzas & Powell. For assistance, please contact us online or call 703-836-1350.

 

Written by Stephen Davis, CPA; Tax Manager.