Following enactment of the Tax Cuts and Jobs Act, there’s been much public discussion about tax rate changes, the 20%qualified business deduction for pass-throughs, and immediate write-offs for equipment purchases. As time goes on, tax professionals are digesting the cataclysmic changes from the Tax Cuts and Jobs Act and finding out that some business practices no longer work. We need to find new ways to proceed.
Let me describe some of the ways the Tax Cuts and Jobs Act is changing how we do business.
Trade-ins
Until now businesses have been used to tax rules governing trade-ins of vehicles or equipment to acquire new ones. You didn’t report any gain or loss on the trade-in; you adjusted the basis of the new item for the amount that would have been gain or loss. Since there was typically a gain on the trade-in (because the cost of the item usually was fully written off and had a zero basis), the basis of the new item would be reduced accordingly. Then when the new item would be disposed of in a taxable transaction, the previously unreported gain would be taken into account.
New rules
When you trade in old items, you must report the transaction. For example, if you’ve fully written off the cost of a machine and trade it in for a newer model, whatever the dealer gives you is essentially profit. However, you can then write off the full purchase price of the new machine, even though you’ve paid part of the price with the trade-in allowance; no basis adjustment is now required.
Entertaining customers and clients
It is common business practice to wine and dine prospective and current customers and clients. This entertaining may include a trip to the theater or a sporting event, or a round of golf. Until now, you could deduct 50% of the cost of entertainment (e.g., tickets, greens fees), provided that certain business discussions took place.
New rules
No deduction is allowed for entertainment costs. This includes ticket prices and meals with a customer or client. Half the cost of your meals while away from home on business continues to be deductible. Businesses likely will continue entertaining customers and clients, even without a tax break. However, small companies may watch their entertainment budget a little more closely in light of being unable to deduct the costs.
Covering employee relocation and commuting
Businesses traditionally have helped employees defray the cost of relocating for the job by reimbursing or directly paying moving expenses. And businesses have been able to deduct certain commuting costs (free parking, transit passes, and van pooling). Companies have been able to deduct their payments and could treat them as a tax-free fringe benefit. No employment taxes resulted from the payments.
New rules
Companies can continue to cover the cost of employee relocations and commuting costs (up to a set dollar limit) on a tax-free basis for employees, but they cannot deduct their payments. Given that this is a tight job market, companies may still offer these fringe benefits despite non-deductibility.
Final thought
I expect that there will be many more changes in business operations as a result of the Tax Cuts and Jobs Act. Likely we’ll see some unintended consequences. You need to work with your tax advisor to adapt your business practices to the new law.
