By Joyce M. Rosenberg
AP Business Writer
NEW YORK (AP) - As small business owners compile their income tax returns, they may have an unpleasant surprise - some popular business deductions have disappeared or been reduced under the new tax law.
While the law gave small business owners new tax breaks including a 20 percent deduction in income for many sole proprietors, partners and owners of S corporations, Congress took back deductions for entertainment expenses, employee transit benefits and what are called net operating loss carrybacks. It also put ceilings on interest deductions for some businesses. Accountants and tax attorneys suspect small business clients to especially miss the break for entertaining clients and customers.
"I think they're going to be shocked at how much more they didn't get as a deduction," says Joseph Perry, a certified public accountant with Marcum in Melville, New York.
A look at the disappearing deductions:
Interest
There is now a limit on how much interest businesses can deduct on their loans and credit lines. While the smallest businesses, those with up to $25 million in average annual revenue over the previous three years, have no ceiling on the interest they can deduct, there are many small businesses above that threshold that are being affected. IRS regulations limit the deduction to 30 percent of a company's adjusted taxable income plus its interest income, if it has any. A motor vehicle dealer can also deduct its borrowing costs for the vehicles it buys and then sells - what's known as floor plan financing interest.
But interest expenses that are above the limit can be carried over and deducted the next year; they will count toward that year's ceiling. And real property businesses including landlords, developers and real estate managers and brokers can choose to be exempt from the deduction if they follow rules on depreciation of their property.
Entertainment
Owners who take customers to sporting events or the theater or treat them to a round of golf will have to foot the entire bill for those activities. The new law has done away with the entertainment deduction for businesses. Many owners use entertainment as a key part of building and maintaining relationships with clients.
But owners can still deduct the cost of taking a client out for breakfast, lunch or dinner; half the amount spent for a business meal is deductible. The IRS also says owners can buy food for a customer at an entertainment event as long as the food is paid for separately. In a notice about meals and entertainment expenses issued in October, the agency used hot dogs at a baseball game as an example. The food is deductible; the tickets are not.
Owners can also deduct 100 percent of the cost of food at parties or picnics for employees.
While the loss of the entertainment deduction may discourage some owners from treating customers to tickets or a golf game, others will decide that paying for entertainment is a worthwhile investment in their companies' future because of the goodwill it creates. That's good business sense, says Ken Rubin, a CPA with Rubin Brown in St. Louis.
"Normally, our general statement is, don't let tax considerations drive the business decisions," Rubin says. Or, as tax advisers sometimes tell their clients: Don't let the tax tail wag the dog.
Employee expenses
The law also eliminated the deduction owners could take for subsidizing their employees' commuting costs. Similar to their decisions about entertainment expenses, owners must decide whether they want to continue giving employees money toward their mass transit fares or parking tabs; given the tight labor market, owners might want to continue providing the benefits to make their companies better able to compete for talented workers. And taking the benefit away could be a morale-buster, says Leon Dutkiewicz, a CPA with Citrin Cooperman in Philadelphia.
"When you run the math, you're going to lose more in goodwill than you would from losing the deduction," he says.
Employees also lost a popular deduction - for job-related expenses like the cost of tools, uniforms and publications related to their work. Owners who want to give their staffers a break might want to take on those expenses and deduct the costs.
Net operating losses
Businesses that lose money no longer have the ability to "carry back" their losses to offset earnings in previous years and get refunds on taxes they paid. The law does allow companies to carry losses forward to an unlimited number of future years, helping them reduce taxes during profitable times.
Although the absence of carrybacks takes away some flexibility for businesses, it isn't likely to be an issue for companies in a strong economy when businesses are doing well, Rubin says. It can, however, be an issue for companies like restaurants and retailers.
"It's a bigger deal for cyclical-type businesses that will make money one year, lose money the next," Rubin says.
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At a loss about lost deductions? IRS website has some guides
By Joyce M. Rosenberg
AP Business Writer
NEW YORK (AP) - The new tax law has eliminated or limited some popular business deductions including those for entertainment expenses and interest on loans and credit lines. Tax professionals predict this filing season is going to be more complicated and painful as business owners see how much money they can no longer deduct.
The lost deductions also include subsidies for employees' transit and parking costs and what's known as net operating loss carrybacks, which allowed companies to get a refund on taxes paid in previous years when they suffer a loss on their operations. But many owners may be unaware of the lost deductions because they don't focus on taxes for much of the year while running their businesses, says Leon Dutkiewicz, a certified public accountant with Citrin Cooperman in Philadelphia.
Dutkiewicz notes that businesses got new tax breaks under the law, including lower tax rates and a 20 percent deduction in income for many sole proprietors, partners and owners of S corporations.
"You can argue that it's kind of an offset," he says of the lost deductions.
Owners who want to learn more about the lost deductions can find information on the IRS website, www.irs.gov :
- The IRS issued a notice in October detailing the changes in deductions for meals and entertainment. You can find it at https://bit.ly/2t2TnlB . The agency has not yet updated its Publication 463, Travel, Entertainment, Gift, and Car Expenses, on its website for 2018, but the IRS has said taxpayers can rely on the guidance in its notice when compiling their returns.
- The IRS put together questions and answers about new limits on deducting business interest; you can find it at https://bit.ly/2Bubh5t . It has updated its Publication 535, Business Expenses, to reflect the changes for 2018.
- Publication 535 explains the elimination of the deduction for employees' commuting costs but notes that if an employer is paying for transit or parking to ensure the safety of employees, the deduction can still be taken.
- The IRS has a brief explanation of the end to net operating loss carrybacks at https://bit.ly/2SxW7pz .
Published: Tue, Feb 12, 2019
