written by Jennifer Cochran
In five months, the Tax Cuts and Jobs Act of 2017 (TCJA) goes into effect. TCJA, which was passed in December, could mean big changes for your company. Vehicle depreciation, like-kind exchange rules for personal property, and meals and entertainment were all impacted by the tax act.
We at Whitlock believe that the best offense is a good defense. As you begin your tax planning for 2018, here are some changes to consider that could have costly consequences for your company.
Changes to company vehicles
The entire cost of a vehicle with a gross vehicle weight rating (GVWR) in excess of 6,000 pounds may now be deducted in a single year as a result of the increase in the bonus depreciation rate from 50 percent to 100 percent. The vehicle, however, needs to be acquired and placed in service after September 27, 2017.
Depreciation claimed on vehicles with a GVWR of 6,000 pounds or less remain subject to annual depreciation caps. These caps are substantially increased by the new law if the vehicle is placed in service in 2018 or later. For example, the first-year cap is $18,000 if bonus depreciation is claimed. The cap is $11,060 if the same vehicle is placed in service in 2017, even if the 100 percent bonus applies because it was acquired after September 27, 2017.
On a related noted, the like-kind exchange rules only apply to exchanges of real property after 2017. This means that you will now recognize taxable gain if your trade-in the vehicle and the trade-in allowance exceed the cost of the vehicle as reduced by prior depreciation allowances. However, if your basis exceeds the trade-in allowance you will recognize a loss.
Changes to meals and entertainment
But vehicles aren’t the only things impacting your company with this new legislation. The tax act establishes additional limitations on the deductibility of certain business meals and entertainment expenses.
So, what does this mean for you? While office parties like company Christmas parties and picnics are still 100 percent deductible, office entertainment expenses are no longer deductible unless they are for the benefit of the taxpayer’s employees. Additionally, sporting event tickets, club memberships, and entertainment related meals do not qualify for deduction.
Because of these changes, it will no longer be sufficient for accounting purposes to use a general account called meals and entertainment. Businesses will now need to have separate accounts for:
- 100 percent deductible meals,
- 50 percent deductible meals, and
- non-deductible entertainment and meals.
While there are a number of changes under the new tax law that will benefit many businesses overall, you will likely need to make some adjustments to ensure you are working within the new guidelines.
As the IRS clarifies the law moving forward, we are committed to keeping you in the know. We pride ourselves on strategic business planning, wealth management and comprehensive tax services to help you succeed. If you have any questions about these changes or want to know how the Tax Cuts and Job Act will impact you, please contact your client administrator.
This is the first blog in a 4-part series examining the impact of the Tax Cuts and Jobs Act of 2017. Check back next month to learn more about how taxes on charitable giving is impacting businesses.