Tax Cuts and Jobs Act Supplemental: Meals and entertainment

Posted by Evan Piccirillo, CPA

For years, many businesses have been keeping track of expenses for meals and entertainment in a single account with little need to communicate with their accountant; it was understood that 50 cents of each dollar would be a tax deduction. No more. Effective January 1, 2018, the Tax Cuts and Jobs Act (“TCJA”) makes notable changes to the tax treatment of certain disbursements relating to these categories of expense. As a result, the accounting for these expenses needs to be reconsidered. Let me break it down for you.

Prior to 2018, meals and entertainment expenses were limited to a 50% tax deduction, unless certain exceptions applied that would allow a 100% deduction. Under the TCJA, entertainment expenses are 0% tax deductible, with very few exceptions, while meal expenses are generally still 50% deductible, with some important changes to the exceptions. Understanding these exceptions is critical to ensuring your business receives the proper tax deduction.

Here is a list of fully (100%) deductible meal expenses:

  • Expenses included in the wages of the employee or included in income of the non-employee recipient (i.e. in W-2 wages of the employee or on a 1099 to a non-employee)
  • Expenses for an employee event (like a party)
  • Expenses for the general public (either as advertising/promotion or goodwill)

Here are 50% deductible expenses:

  • Meals with clients
  • Employee travel meals
  • Meals provided to employees for the convenience of the employer (but 0% after 2025)

And the 0% deductible expenses:

  • Entertainment for employees or clients (including sports and events tickets, membership dues to clubs, etc.)

Aside from the 50% to 0% change to entertainment expenses, the next most notable change is that of 100% to 50% (and later to 0% after 2025) to meals provided to employees for the convenience of the employer. In the past, these were considered de minimis fringe benefits and received a dollar-for-dollar tax deduction, but under the new law these kinds of expenses must be included in an employee’s income to be 100% deductible or fall to the 50% category. Not good for hungry employees and their employers.

To accommodate these new tax rules, businesses have to disambiguate meals and entertainment into entertainment (which is nondeductible), meals that are 50% deductible, and meals that are 100% deductible on their books. In absence of these separate ledger accounts, tax preparers will have to inquire about the allocation and taxpayers will need to analyze the charges booked to such an account, which can add time and contribute to errors.

Additionally, employers may need to review their policies and procedures for providing meals and/or entertainment to their employees and clients. Certainly they will need to reconsider those sports facility box seats. Also, since parties for employees are 100% deductible, perhaps it’s time for businesses to start throwing more parties?

If you would like additional guidance on this topic, contact your trusted advisor to assist you in making decisions going forward and to establish sound procedures to properly account for meals and entertainment expenses on a prospective basis.

Wake up with REM: Pretty fly for a WiFi

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A lot has changed since the early 1990s. The internet is no longer an amenity; it’s a utility. In our current corporate culture, WiFi connectivity has come to be considered more of a right than a privilege. Right or wrong, the internet is here to stay—and today’s tax news reflects that. Read on, Macduff…

  • Sales tax bonanza for towns with an Amazon warehouse has other cities eyeing a cut. [Sacramento Bee]
  • The Inevitable Clash Between Seattle and Amazon Has Begun [Slate]
 
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  • Stormy Daniels, Michael Cohen, Giuliani, Trump, and (drumroll) TAXES! Oh, come, now. You know we're a tax blog, right? How could we be talking about anything else? [Forbes]
  • Keep your head in the cloud, because that's where your ledgers will be. 5 key tech innovations helping accountants transform their businesses. [Accountancy Age]
  • Tennessee tax breaks are poaching Wall Street businesses and bringing them to Nashville. [Bloomberg]

And in keeping with our internet theme, here's how we ended up with the word "meme." It's probably not what you think...

 
 

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Navigating the Tax Cuts and Jobs Act: Volume 2 – Rate reductions

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Posted by Evan Piccirillo, CPA

The most straightforward and significant change of the Tax Cuts and Jobs Act (TCJA) is the reduction in income tax rate to corporations and individuals.  This is the “giveth” of the TCJA, and while there are many “taketh aways,” which we will discuss later on, all things being equal, most entities and people will consequently pay less tax.

Corporations

Corporations pay a flat 21% tax on income, and this provision is permanent (meaning there is no language in the law that builds in an expiration of this provision).  Prior to 2018, corporations would pay tax based on graduated rates as determined by their taxable income for the year (taking into account the dreaded alternative minimum tax (AMT)).

Here are the rates for 2017:

TCJA Rate Reductions Chart 5-1-2018.JPG

You may have noticed that this table contains a rate that is lower than 21%, namely the lowest bracket for corporations with taxable income of less than $50k.  Those corporations will be paying more tax under the new regime.  That aside, the 21% rate will result in a much lighter tax burden for most corporations.  I stress here again that this is under an “all things being equal” scenario.  There are other provisions of the TCJA (which we will address in future posts) that will add to these corporations’ tax burdens, given certain circumstances.

Fiscal year taxpayers (that is, corporations with year-ends other than 12/31) will pay tax on a blended rate.  The blended rate is the sum of the ratios of the old tax rate for the number of days in 2017 and the new tax rate for the number of days in 2018.  For example a June 30 year-end will have a blended rate of about 28%.

Also, the corporate AMT is eliminated!  Certain AMT credits will be recoverable as well, which mean those benefits will not be lost.

Individuals

Individuals will pay a 7-bracket, progressive tax.  The rates for most of the brackets drops from 1-3% and most brackets will begin at a higher dollar amount of income as compared to prior years.  This rate reduction will be in effect for only 8 years and then revert to the pre-2018 structure, so remember this “giveth” has an expiration date, unless our legislators decide to extend it.  Prior to 2018, the tax methodology was similar, but at less favorable rates.

In spite of many of the itemized deductions that are suspended while these individual rate reductions are in effect (which we will discuss in later posts), many individual taxpayers will be pay less tax under this regime.  It may vary on a case-by-case basis (as individual tax always does), but for the most part, this is a clear benefit to individuals.

The (kind of) bad news is that the individual AMT has not been eliminated in fact, but I do believe that it has been eliminated in effect.  The thresholds and exemptions have been increased and the primary culprit in determining AMT applicability for most taxpayers (the itemized state tax deduction) is severely limited.  It will be a very rare instance that AMT will apply.

The TCJA has many “giveths" and “takeths", but the rate reductions are a clear “giveth” on the corporate side and individual side alike.  Don’t get too excited yet, because our legislators have found many, often very complex, ways to recover some of this lost tax revenue.

If you have any questions or would like to better understand this, reach out to your trusted advisor, or email me.  Stay tuned for our next post, where we will explore a significant “taketh” provision!

Wake up with REM: "Potpourri" for $200, Alex

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When you’re an accountant, tax is never trivial. But because today’s “Wake Up” stories have no common theme, we’ve chosen “Potpourri” as our category, and included some trivia questions just for you.

Trendsetting in accounting [Accounting Web]

Will $12 billion tax bite drive rich from California? [California Matters]

Did the new tax law cut your taxes? You might be surprised [Minnesota Public Radio]

Can taxes shape an industry? Evidence from the implementation of the “Amazon Tax” [Wiley Online Library]

 

Feeling smart today? Test your tax trivia with The REM Cycle's Tax Jeopardy Quiz.

Got a tax trivium we missed? Let us know in the comment section below.

 

We'll let Alex Trebek have the last word...

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Top 10 things tax accountants will be doing after tonight's tax deadline

After a three-month marathon session of tax work, many tax accountants will be breathing a sigh of relief at midnight on April 17. Once the realization sets in that the due date has passed and they are unburdened from the intense weight of that deadline, now what? Time to deflate and recharge is essential to anyone that has just gone through such a gauntlet. The REM Cycle polled the staff of Raich Ende Malter and compiled the top 10 things that tax accountants will be doing on Wednesday, April 18, 2018.

Some of the fill-in responses were great, but didn't receive enough votes to make it onto the chart. Honorable mentions include:

  • "Sit in silence and wait for the next tax season."
  • "Celebrating my 47th wedding anniversary." Congratulations, by the way!
  • "Keep working on April 30th deadlines. Sincerely, the financial services group."
  • "Watch a Mets game all the way through without falling asleep."
  • "Deal with all the file rejections -- tax season doesn't end on the deadline."
  • "Celebrating my birthday April 18th, along with many checked items." Happy birthday!
  • "Have the luxury of deciding what to do when I wake up that day. Not knowing is exciting and may be something wonderfully unexpected."

What are your plans for tomorrow? Let us know in the comments section below.

Wake up with REM: Rube Goldberg edition

Income taxes are like Rube Goldberg machines: a movement by one element will impact another in surprising ways. Income goes up, some limitations go down; check this box, now we’re getting a refund. Yet somehow, by line #63 (Total Tax), we arrive at an answer the taxpayer and the IRS can both agree on (we hope). With that in mind, The REM Cycle presents tax news with a liberal sprinkling of Goldbergian facts and videos to get you through this final week of tax season. Hang in there, folks!

The IRS’s overall audit rate continues to plummet, with less than 1% of individual and partnership returns being audited. Does this situation mean more people and companies will cheat on their taxes? The answer? “It’s complicated.” [Forbes]

Debt among older Americans is rising fast. In 2017, retired workers received an average of $1,404 per month in Social Security benefits—but this amount can be reduced due to student loans. Mortgage and credit card debt only compound the problem. What to do? [CNBC]

The TCJA’s expensing and income tax changes may become permanent. Will it affect you? Will it even come up for a vote? [TaxFoundation.org]

Books to inspire financial well-being. Focusing on your well-being is an important part of life. Get a good night’s rest. Eat a healthy breakfast. Go for a jog, practice some yoga, forego that yummy cheeseburger in favor of a salad — all with the goal of being our best possible self. Extend that focus to your financial health with this list of recommended books. [New York Times]

 

Damian Kulash, lead singer of OK Go, talks about the insane amount of math involved in creating their video for “The One Moment.” (See the video he’s discussing here.)

This video is part of www.OKGoSandbox.org

 

Like a Rube Goldberg machine, federal tax swings down, state income tax pops up. Here’s why. [Politico]

13 ingenious facts about Rube Goldberg. Goldberg was likely the only Pulitzer Prize-winning cartoonist with a degree in engineering, a rap sheet for refereeing a street fight in Harlem, and a “Three Stooges” screenplay under his belt. [Mental Floss]

 

His inexhaustible reservoir of elaborate contraptions that mutated simple tasks into madcap feats of ingenuity made Rube Goldberg rich and famous. But he was also an all-around cartoon man and artist. (New York Times)

 

ICYMI: A behind the scenes look at the design and building of the Goldberg apparatus for OK Go’s music video for “This Too Shall Pass.” [Pehr Hovey]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Self-employment tax: the other tax reform

 
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iStock

 

Posted by Courtney Kopec, CPA

While the headlines parsed the effects of the Tax Cuts and Jobs Act of 2017, other important tax issues affecting the owners of pass-through entities were being scrutinized. Over the past year, the U.S. Tax Court modified self-employment (“SE”) tax guidelines to firm up the limited partner and LLC pass-through rules previously used to avoid self-employment tax on income earned by certain taxpayers.

S corporation ordinary income is not subject to SE tax

In Fleischer v Commissioner (TC Memo 2016-238), the taxpayer created an S corp entity to report non-employee compensation from a service provider contract he entered into with MassMutual as a financial services provider. The intended result was to exclude self-employment income tax because S-corp pass-through income is not subject to SE tax. The Court determined the income should have been reported on Schedule C and subject to SE tax. The Court applied two tests to determine whether the corporation was the controller of the income: first, the individual providing the services must be an employee of the corporation; and second, a contract must exist recognizing the corporation’s controlling position. The Court determined that the taxpayer, not his S corporation, had earned all the income.

A partner’s power is either general or limited, but not both

In Castigliola v Commissioner (TC Memo 2017-62), a law practice that was incorporated as a professional limited liability company by three attorneys had a compensation agreement that was reasonable based on average salaries in their area. The partners reported the guaranteed payments they received as subject to self-employment tax. However, the net profits distributed in excess of the guaranteed payments were reported as not subject to SE tax. The taxpayers argued that the guaranteed payments reflected reasonable compensation for their services and the earnings in excess were attributable to the partner’s investment and were akin to the items of income or loss of a limited partner. The Court determined that in the absence of a written operating agreement that identified a general partner, all three attorneys had equal management power that was in no way limited. None of the partners could be considered as limited and classify their additional income as limited partner income. Therefore, all three attorneys were general partners and all income was subject to SE tax.

A surgeon successfully separates out his passive activities

In Hardy v Commissioner (TC Memo 2017-16), a surgeon (Hardy) performed surgeries at a facility in which he held a 12.5% minority interest and so considered himself a limited partner. He held no management authority at the facility and his distributions were not related to his performance. Hardy reported the income as passive and, at first, also paid self-employment tax on the income. The core issue was whether Hardy properly reported the income as passive and the activities should treated as a single activity and “constitute an appropriate economic unit for the measurement of gain or loss for the purposes of Section 469.” The IRS argued that Hardy’s payment of SE tax implied that the activities were non-passive and should be grouped as a single activity. The Court rejected the IRS argument and held that Section 1.469-4(c)(2) permits a taxpayer to use any reasonable method of “applying the relevant facts and circumstances” to group activities and, therefore, the taxpayer was not liable for the SE tax. He would have been liable for SE tax and could not use the passive losses if the Court determined the activities were to be grouped as a single activity.

Tax planning considerations

The implications of the three cases presented are clear: the IRS wants to subject pass-through entity income to self-employment tax, where appropriate. The owners of S corps who do not take reasonable compensation are easy prey for IRS auditors. If you are an entrepreneurial owner of an S corporation and are not taking salary, or if you are a managing partner in a partnership entity, you should consult your CPA tax advisor to review your tax exposure under these types of situations.

Further reading

Wake up with REM: Spring fling edition

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Spring has sprung, the vernal equinox has been and gone, and everyone you know is sleep-deprived thanks to Daylight Saving Time. If you're looking for a break from tax season, we’ve got just the blog post for you. (Hint: it begins right below this paragraph.)

State sales tax is being collected by Amazon—but cities haven’t seen a dime. Amazon now collects sales tax in every state that has one. Why aren’t local governments receiving any of the revenue? [New York Times]

How will tax reform affect carried interest and private equity? This is the $64,000 question that only the newly enacted IRC Section 1061 can answer. [MiddleMarket.com]

How the new tax law creates a “perfect storm” for Roth IRA conversions. Word to the wise: while it’s true that contributing annually to your Roth IRA is generally a good idea, doing so does not guarantee that you will get to meet George Clooney. Yes, we were disappointed, too. [MarketWatch.com]

 
 

Raise a glass! Raich Ende Malter counts several distilleries as clients, so we would be remiss for not mentioning that March 27 of each year is International Whisk(e)y Day. The parenthetical “e” is a tip of the hat to the difference in spelling for Irish and American whiskeys and their Scottish, Canadian, and Japanese (Japanese whisky is apparently a thing) counterparts, which drop the “e.” Not to be confused with World Whisky Day or National Bourbon Day. Remember this at your next pub trivia night.

“Spring clean” your finances with these seven tips. Most people start their spring cleaning right around now. We de-clutter, wash the curtains, replace air filters, pack up our winter clothes and bring out the short-sleeved shirts. But what about neatening up your finances? [WKTR.com]

California considers lower taxes on pot to help new legal industry compete with black market. Good news for Seth Rogen! [Los Angeles Times]

VIDEO: Daylight Saving Time Explained. [YouTube]

EGG MYTH BUSTED! Balancing an egg on the equinox explained. Take that, Humpty Dumpty. [YouTube]

ICYMI: At last! A self-driving potato. [YouTube]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Blockchain: the future of accounting?

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Valuation of cryptocurrencies has fluctuated in recent months, drawing interest from every type of investor. While the markets remain volatile and uncertain, we here at REM believe that blockchain technology will play a significant role in the future of accounting. The concepts we first introduced in Blockchain 101 are here again in an infographic provided by the Bachelors of Science in Accounting Program at Maryville University Online, which demonstrates how blockchain can and will change some of the fundamentals of the accounting profession. We have taken part in many information sessions regarding the details of these key areas to blockchain technology and how it can impact our clients and the way we do business in the near future.

The key concepts we particularly focus on as auditors (and you should, too, with respect to blockchain) are security, trust, and verifiability. We ask:

  • How is the blockchain built?
  • How is the underlying data encrypted and how can we verify the integrity of the encryption?
  • Who are the users and who has the ability to post transactions to the blockchain network?
  • What is being transacted?
  • Who validates transactions and maintains records of the ledger?
  • What access points do we have to the ledger?
  • Do we have access to multiple points of verification?
  • Is a trusted third party involved in the validation of transactions and ledger maintenance, or is it a trustless application with distributed functionality?

In other words, a fundamental concern is whether the blockchain is centralized and vulnerable to record alteration, or whether the validation/maintenance functions are decentralized and distributed across a wide network of participants. This essentially provides an unalterable/immutable/censorship-resistant ledger with network consensus.

At REM, our Think Lab is working diligently to develop our knowledge base and identify best practices in embracing and utilizing this powerful tool. Feel free to contact us with your questions and your concerns about how blockchain might improve your business.


Click here for a quick primer on blockchain terminology.

Source (For enlarged version, click here.)

Wake up with REM: Pi Day edition

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As accountants, we get excited about numbers. It’s kind of what we do. That’s why we’re tipping the hat to our favorite mathematical constant one day early here at the REM Cycle. March 14 is traditionally Pi Day, a global celebration of π, or Pi. Pi is the ratio of the circumference of a circle to its diameter, approximately 3.14159. (March 14 = 3.14 … get it?) So while we’ve got some great tax-related content for you today, you can also delight in some smart and quirky pi facts, courtesy of Raich Ende Malter & Co. LLP. You’re welcome.

Retiring soon? Forbes has an excellent guide to 12 retirement investment options. [Forbes]

Philadelphia accountants overlooked sales tax for a food service client. Waterfront Gourmet Corporation of Philadelphia is now on the hook for over $70,000 in back sales tax, including penalties. What happened? [PennRecord] (Full disclosure: Waterfront does not sell pies. We checked.)

Not everyone can effectively use Health Savings Accounts. But it’s definitely worth learning the ins and outs of HSAs—and how they can fit into your tax deductions. [The Motley Fool]

“A host of errors and ambiguities.” Ouch. Apparently, rushing a bill through Congress can result in costly mistakes—especially when it's a set of laws that fundamentally change our tax structure. Here’s what happened, and what the government is doing to address it. [New York Times]

ICYMI: The rich are happier about their taxes than the poor. Huh? [MotherJones.com]

8 National Pi Day 2018 Freebies and Deals: [Parade]

RECIPE: Bake the perfect Pi. [Pillsbury.com]

VIDEO: Calculating pi with real pies. We are So. Hungry. Right. Now. [YouTube]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.