It’s the Most Wonderful Time…To Review Business Expenses for Deductibility
It’s the Most Wonderful Time…To Review Business Expenses for Deductibility
As this year draws to a close, it’s wise to take the time to review your business expenses for deductibility in light of the changes made by the Tax Cuts and Jobs Act, which minimizes or omits many deductions. Below is an overview of these changes. While reviewing them, you may decide to revise your business expense and reimbursement plans.
Permissible Deductions
Rather than providing businesses with a master list of specifically authorized or excluded deductible business expenses, the Internal Revenue Code (IRC) provides Sec. 162, which approves businesses to deduct their “ordinary and necessary” expenses. These expenses need not be indispensable, but they are ones that are generally accepted as common, valuable, and relevant in your industry. However, if it’s considered excessive or indulgent, the IRS may not allow the deduction.
TCJA Changes
Below are some of the notable changes made in the TCJA that affect the deductibility of business expenses.
Meals and Entertainment
While the act now excludes most deductions for entertainment expenses directly related to your business, the 50% deduction for business meals still applies. And just recently the IRS clarified that business meals purchased in association with nondeductible entertainment are still 50% deductible, as long as the purchase is easily separated from the entertainment for accounting purposes or the cost is separately reflected on invoices or receipts.
Transportation
The act disallows deductions for transportation fringe benefits, such as parking, van-pooling, and transit passes. These benefits are valuable to employees because they’re tax-free, so whether or not employers choose to discontinue such benefits remains to be seen. Other kinds of transportation deductions, such as flights for employee business travel, remain unchanged.
Employee Expenses
Employee deductions for unreimbursed job expenses – previously claimed as itemized personal deductions – are excluded under the TCJA through 2025. However, reimbursements are deductible by the business and tax-free to employees, so implementing a reimbursement plan that meets IRS requirements may be a smart move for some businesses.
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