The Tax Cuts and Jobs Act made many favorable changes for businesses, including a lower corporate tax rate, a new 20% business income deduction for owners of pass-through entities, and favorable rules for writing off the cost of certain property investments. But it also ended—permanently or temporarily—the ability to claim certain write-offs that businesses have come to know and love.
Business Tax Breaks That Went Away in 2018
Here’s what you won’t see on 2018 returns:
Until now, you could deduct 50% of the cost of entertaining customers, clients, vendors, and other business associates. Starting in 2018, no deduction can be claimed for entertainment cost, not matter how reasonable or essential it is for your business. So if you take a customer to a ballgame, the cost is on you alone no matter how much business you discuss.
Net Operating Loss Carryback
If your business has a net operating loss for a tax year ending after 2017, you can no longer carry it back to offset taxable income in certain prior years and receive an immediate tax refund. Instead, the NOL is simply carried forward until it’s used up. The only exception is for farmers, who continue to have access to a 2-year carryback.
Business Losses for High-income Owners
If you are an owner in a pass-through entity (e.g., sole proprietorship, partnership, S corporation) and you experience a significant business loss, you may not be able to claim it all in the current year. For 2018 through 2025, “excess business losses” are not currently deducible but instead treated as a net operating loss that is carried forward (as explained earlier). Excess business loss means the excess, if any, of business deductions over the sum of business income plus $250,000, or $500,000 on a joint return (adjusted annually for inflation).
Transportation Fringe Benefit Deduction
You may choose to cover certain employee commuting costs and they aren’t taxed on this fringe benefit. In 2018, up to $260 per month for free parking, transit passes, or van-pooling is tax-free to employees; it remains exempt from employment taxes. But as the employer, you can no longer deduct this cost.
Small Business Deals
Deduction for Relocating Employees
Until now, if you paid the moving expenses of an employee, you could reimburse the employee on a tax-free basis and deduct the expense (assuming certain conditions were met). For 2018 through 2025, the reimbursement is taxable to the employee. Because it’s taxable compensation, you now have to pay employment taxes on it.
Capital Gain Treatment for Self-created Patents
If you created a patent, invention, design, or secret formula and then sell, you won’t have a capital gain (top rate of 20%); you’ll have ordinary income (top rate of 37%). This change applies for dispositions after December 31, 2017.
Deferral for Gain on Trade-ins
Until now, if you traded in your vehicle for a new one, you didn’t have to pay tax on the gain from the old vehicle. This was treated as a like-kind exchange on which gain could be deferred. But like-kind exchanges after 2017 are limited to exchanges of real property.
Domestic Production Activities Deduction
If you made something in the U.S., you may have qualified for a 9% domestic production activities deduction. This break, which didn’t require any special outlay or action (you got it if you qualified), has been repealed after 2017.
Deduction for Certain Sexual Harassment Settlements
If your company pays an award or settlement for sexual harassment or sexual abuse after 2017 and the terms are kept confidential, no deduction is allowed. It would seem that if there’s no confidentiality agreement, the payment may be deductible.
Fully Deductible Interest Expense
If you’re a small business (average annual gross receipts for the 3 prior years not exceeding $25 million), you can deduct all of the business interest you pay on loans, credit cards, etc. But if you’re bigger, starting in 2018 your annual interest expense deduction is limited to the sum of your business interest income, 30% of adjusted taxable income, and floor plan financing (for car dealers and certain others using this type of financing). Farming and real property businesses (e.g., those in construction, development, leasing, management, etc.) can elect to be exempt from the limitation, but then they must use slower depreciation for their realty.
Because of all the tax changes for 2018 and beyond, it is essential that you meet with your tax advisor now. Discuss the impact of the elimination of the tax breaks discussed above, as well as new opportunities to which you may be entitled.
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