Chapter 11: Starting Your Own Business

Business Travel, Meals, and Entertainment:

As of January 1, 2018, the rules for deducting your business travel, meals, and entertainment expenses have dramatically changed.

The following are 100% deductible:

1. Food and beverages provided to the general public, including clients in the reception area, at open houses, or other client related events.
2. Social expenses primarily for the benefit of the employees, including holiday parties, parties and events, after work socials, or trips with employees.
3. Entertainment awards such as sports tickets, gym memberships, etc. are 100% deductible if primarily for the benefit of the employees. These expenses should be accounted for in a separate category, such as “office expense” or “employee benefits” for these business activities.

The following are 50% deductible:

1. Food and beverages that are provided on the business premises for the benefit of the employees. These benefits are not taxable to the employee. This includes staff meals provided for working through lunch and dinner, as well as staff meetings.

2. Business meals with clients or prospective clients.

3. Meals provided before or after presentations or seminars to prospective clients.

4. Business meals while traveling, such as meals while attending continuing education meetings, conventions, study groups, suppliers, advisors or any other trip that has a true business purpose.

5. Per IRS Notice 2018-76, certain rules must be complied with in order to still receive 50% deductibility treatment for client business meals (food and beverage). These meals expenses must meet the following criteria:

a) Must meet the ordinary and necessary test

b) Must be incurred in the taxpayer’s trade or business

c) It cannot be lavish or extravagant.

d) The taxpayer or an employee of the taxpayer must be present

e) Meals must be furnished to current or potential customers, consultants, clients, or similar business contacts

6. For meals purchased during an entertainment activity, the meals must be either purchased separately from the entertainment activity or listed separately on the receipt.

The following are not deductible:

1. Any travel, meals, or entertainment that is not business –related would be considered personal and therefore, not tax-deductible to your business as it has always been in the past.
2. Entertainment expenses for clients, prospective clients, and referrals. This includes the cost of tickets to sporting events, concerts, or any other form of entertainment if not primarily for the benefit of the employees.

Personal Legal and Accounting Fees

Personal tax planning and preparation is non-deductible under the new tax law, however, the cost of business tax planning and preparation is still fully tax-deductible. You should request that your tax preparer bills you the full amount for these services that are related to your business accordingly.

For your personal tax preparation, you should be billed separately, but only a minimal amount based on what your tax preparation services would have been without being a business owner. Also, if you have Schedule C, Schedule E, or Schedule F income, your personal tax preparation fee should be itemized by cost since these items can still be deducted as they relate to each business activity.

Section 199A Business Income Deduction

Congress’s decision to exclude reasonable compensation and guaranteed payments from qualified business income wages paid to a shareholder or guaranteed payments to a partner will place those taxpayers at a disadvantage relative to sole proprietors and single member LLCs at certain income levels.

An owner of an S corporation or a partnership may be at a disadvantage relative to a Schedule C filer (sole proprietor and single member LLC) when the owner’s taxable income is below the threshold since their W-2 income or guaranteed payments to partners is not considered part of qualified business income. This is because Section 199A states that qualified business income does not include reasonable compensation paid to a shareholder in an S corporation or guaranteed payments made to a partner in a partnership.

When income is below the threshold, the reasonable-compensation requirement works against the shareholder in the S corporation, reducing both his qualified business income and Section 199A deduction. The same is true for any payment treated as a guaranteed payment to partner in a partnership.

The exclusion from qualified business income of reasonable compensation paid to S corporation shareholders and guaranteed payments to partners of a Partnership may result in higher tax liabilities when compared to those required to file a Schedule C with similar income levels.

Hopefully, future guidance under Section 199A will provide for the inclusion of shareholder compensation (W-2 wages) and guaranteed payments to partners in qualified business income, which would create equality between Schedule C filers, partners in partnerships, and shareholders of S corporations.

On January 22nd, the IRS released the final regulations regarding Section 199A (see FAQs on IRS.gov):

The final regulations provide additional information as to whether particular activities in particular industries are activities of an SSTB.

1. Health - The sale of pharmaceuticals and medical devices by a retail pharmacy is not by itself a trade or business performing services in the field of health. However, some services provided by a retail pharmacy through a pharmacist are the performance of services in the field of health

2. Performing Arts – To the extent that a writer is paid for written material, such as a song or screenplay, that is integral to the creation of the performing arts, the writer is performing services in the field of performing arts.

3. Consulting – A business that assists other businesses in meeting their personnel needs by referring job applicants to them does not engage in the performance of services in the field of consulting when the compensation for the business referring job applicants is based on whether the applicants accept employment positions with the business searching for employees.

4. Commodities - The final regulations provide that that the definition of dealing in commodities for purposes of Code Sec. 199A should be limited to a trade or business that is dealing in financial instruments or otherwise does not engage in substantial activities with respect to physical commodities.

5. Services or property provided to an SSTB - If a trade or business provides property or services to an SSTB and there is 50% or more common ownership of the trade or business, the portion of the trade or business providing property or services to the 50% or more commonly-owned SSTB will be treated as a separate SSTB with respect to related parties.

6. Trade or business of being an employee - The regulations provided that an individual who was previously treated as an employee and is subsequently treated as other than an employee while performing substantially the same services to the same person, or a related person, will be presumed to be in the trade or business of performing services as an employee for purposes of Code Sec. 199A. The presumption only applies for the three years after the worker has ceased to be treated as an employee for Federal employment tax purposes.

Depreciation

The IRS has finally released an update as to the tax treatment of improvements and their proper depreciation.

Any improvements made to residential property must be depreciated over 27.5 years.

Any improvements made to nonresidential property can be depreciated using the Section 179 deduction. This includes qualified improvement property, roofs, HVAC, fire protection systems, alarm systems, and security systems.

If these improvements are attributable to the enlargement of the building, the elevator or escalator, or the internal structural framework of the building, they must be depreciated over 39 years.