Changes to Business Travel & Entertainment Deductions for 2018 Created By the “2017 Tax Cuts and Jobs Act,” (P.L. 115-97).
Beginning January 1, 2018 business entertainment expenses are no longer deductible. The following are examples of entertainment expenses that are no longer deductible; Sporting Events, Concerts and other tickets, Club Memberships or Dues for any Club organized for business or pleasure, use or rental of boats for entertainment and all other expenses whose primary purpose is the amusement and or entertainment of clients, customers, prospective customers, or employees. Deductions for these are no longer permitted regardless of the business purpose the entertainment is provided for.
This does not mean that businesses can not continue to use entertainment when necessary to grow or reward their customers and employees. It simply means that such expenses will not be deductible and hence will not decrease taxable income.
Generally, business travel remains fully deductible, with business meals 50% deductible. However, beginning January 1, 2018 these deductions will be available only to businesses and not individual taxpayers. Miscellaneous itemized deductions, including employee business expenses, are no longer allowed to be claimed on individual tax returns.
If an employee is reimbursed by his employer under a “non-accountable plan,” the reimbursements are to be included in the employee’s gross income, reported as wages on his Form W-2, and are subject to withholding along with other payroll taxes. Business expenses paid under a non-accountable plan are not deductible by the employee.
Items reimbursed under an “accountable plan,” are not reported as income to the employee. In this case the employer deducts reimbursements paid to the employee after making a reduction for 50% of the expense for meals.
Deductible Travel Expenses
- Travel by air, bus, taxi, train, or automobile
- Lodging expenses
- Baggage charges
- Cleaning and laundry charges
- Cost of temporary help during business travel (i.e. secretarial help or telephone answering service)
- Reasonable tips
- Expense of transporting sample cases or display materials
- Telephone calls
Deductible Entertainment Expenses
None. The “2017 Tax Cuts and Jobs Act,” (P.L. 115-97), eliminated the deductibility of entertainment expenses for all business, beginning on January 1, 2018.
While business may still chose to make these expenses as they see justified by their business, they may not deduct them on their tax returns.
Deductible Meal Expenses
- Food, beverages, taxes, and tips
- Meals on business trips
- Meals furnished to employees on the employer’s premises
- Transportation to or from restaurant
- Limited to $25 per recipient per year
Deductible Automobile Expenses
Taxpayers may generally use one of two methods for computing car expenses: the actual cost method or the standard mileage rate method. The standard mileage rate may not be used in certain situations; the actual cost method may be used by any taxpayer.
- Gas and oil
- Repairs, maintenance, tires
- Insurance and licenses
- Car loan interest (except employees)
- Car lease payments (special rules)
- Parking fees and tolls
Depreciation. Vehicles may be depreciated under the accelerated cost recovery system as five-year property. Because the law limits depreciation deductions for so-called ‘luxury’ vehicles, there are maximum yearly depreciation limits. These limits are adjusted annually for inflation.
First-year Expensing Election. The first-year expensing election for vehicles is also limited. This limit is adjusted annually for inflation. The amount expensed reduces basis for depreciation.
More than 50% Business Use. Both the expensing option and accelerated depreciation are allowed only if the car is used more than 50% for business. If the car is used less for business, depreciation must be taken on the straight-line method over five years. This 50% business use test does not affect the deductibility of the business portion of other operating expenses.
Standard Mileage Rate
In using the standard mileage rate, the taxpayer deducts the number of business miles driven times the current rate per mile specified by the IRS. (mileage x rate = deduction) The Standard Mileage Rate for 2018 is 54.5¢ per mile.
Commuting Expenses. Commuting expenses, which includes travel to and from the job, are not deductible.
In 2018 with the disallowance of miscellaneous itemized deductions for individual taxpayers the Standard Mileage Rate will only be useful for reimbursement of business miles from an employer to an employee under an accountable plan, sole proprietorships and partnerships with unreimbursed partners.
In some cases, per diem amounts may be used in lieu of keeping track of actual expenses for away from home lodging, meal, and incidental expenses. Under the per diem method, the amount of the expense is considered to be substantiated. Actual substantiation of the time, place, and business purpose of the expense must still be provided.
All deductions for business use of automobiles must be supported by written documentation such as a log or calendar showing business mileage by date or event.
Requirements for Deductibility
Expenses for business travel and meal expenses – must meet the following tests in order to be deductible.
The expense must:
- Be incurred in a trade or business carried on by the taxpayer
- Be ordinary and necessary to the business
- Serve a clear business purpose and be directly related to the active conduct of the trade or business
Business travel is fully deductible; business meals are only partially deductible. While business entertainment is not deductible beginning 1/1/2018. Furthermore, a company representative must be present during a business meal, and substantial and bona fide business discussion must take place directly before, during, or after the meal.
Business travel, meals, and entertainment expenses must be substantiated by adequate records. An account book, diary, log, expense record, or the like should be kept. The expense and the business purpose must be recorded at or near the time of the activity. Information that must be recorded varies with the kind of expenditure but generally includes the following:
- Amount spent
- Date, time, and place of expenditure
- Business purpose of activity
- Name and business association of individuals involved
In addition, a receipt or other substantiation is required for all lodging.