On Dec. 22, 2017, the United States Congress passed the most significant overhaul of the tax code in 30 years. This sweeping legislation will impact nearly every household and every business in some way, both negatively and positively.
by By Ronnie Garrett
On Dec. 22, 2017, the United States Congress passed the most significant overhaul of the tax code in 30 years. This sweeping legislation will impact nearly every household and every business in some way, both negatively and positively. Here, we take a quick look at some of the primary changes and how they might affect those who plan, hold and attend meetings and events.
The core of the plan is a massive and permanent cut to the corporate tax rates, lowering the top rate from 35 percent to a flat rate of 21 percent, says Bill Kangas, a CPA at Business & Tax Accountants, a certified public accounting firm located in Greenfield, Wisconsin. In his role, he’s been working with small business owners in public accounting for more than 15 years.
Kangas says this change is one of the “big buzzers,” but he points out the largest impact is going to be for C-corporations, which is any business that is taxed separately from its owners. A venue, such as a large convention center, might be taxed at the new rate—if it is a C-corporation. However, most planners will be unaffected by this change because they fall under what is known as a pass-through entity, which is a business that is not taxed at the corporate level.
“They might be a single-member LLC, they might be a partnership, or they might be what we deem an S-corporation, and in those cases, going to a flat 21 percent tax rate is pretty much a moot point,” Kangas says.
Kangas reports the Tax Cuts and Jobs Act bill also impacted Sec. 179 expensing by increasing the maximum amount a taxpayer may expense in the year of purchase up to $1 million while also increasing the phaseout threshold to $2.5 million. These amounts will be indexed for inflation after 2018. Previously, the maximum amount was capped at $500,000.
In addition, the tax change also expanded the definition of Sec. 179 property to include depreciable tangible personal property used to furnish lodging or in connection with furnishing lodging, and expanded the definition of qualified real property eligible for expensing to include any of the following improvements to nonresidential real property: roofs; heating, ventilation and air-conditioning units; fire protection and alarm systems; and security systems. This again may have an impact on the taxation of businesses operating large event venues, but likely will not impact planners and other vendors running small event-related businesses.
Now, when businesses purchase equipment under the new tax code, they can write it off in the first year. “With the old law, they could only expense up to $500,000 of that equipment purchase in the first year. That number will increase to $1 million in 2018,” he says.
Kangas reports businesses will have to weigh the profitability of the business in a given year against their forecast for the year ahead to see if a full write off makes sense. “If you have a business that is profitable, you’re going to want to write off the full value of the equipment that they bought in the year of purchase to help reduce the profits of that business,” he says.
The Section 199A deduction, also known as the Qualified Business Income Deduction, also changed in the new tax code and represents what could amount to a significant tax break for small business owners. This is a deduction from a business income to arrive at a taxable business income amount. Kangas says with this change there is the “potential for 20 percent of that to be excluded from taxes.” Therefore, if a business shows a profit of $100,000, under this rule, they may be able to pay taxes on just $80,000.
However, this new provision is complicated, according to Kangas. It contains information on exclusions, phase-outs and other uncertainties so every pass-through business may not get the full benefit of this deduction. For instance, it is not applicable to businesses that provide services (doctors, lawyers, accountants, etc.), unless their taxable income is less than $157,000 (individual) or $315,000 (married). There are a host of calculations that figure into this deduction, and Kangas recommends consulting with an accountant regarding this change and how it will impact your business.
When it comes to meals, there has been a mass of changes from the old rules to the new.
For instance, while holiday parties remain 100 percent deductible and meals for employees who are traveling are still set at 50 percent deductible, there have been some changes that are not so cut and dried. Buying food for employees being asked to work late is now 50 percent deductible instead of 100 percent, and inhouse cafeterias once were 100 percent deductible, but they now are only 50 percent deductible.
Says Kangas, “There has been a great deal of scrutiny since the new tax law came out as far as interpreting what the IRS deems deductible or nondeductible as it relates to meals and things like that.” He expects the IRS to release specific definitions and guidelines as it pertains to this change in the months to come.
“As it relates to travel, if an employee must visit a customer or attend an event out of town, all their travel expenses, including their airfare, hotel, taxi, rental car, etc. will be 100 percent deductible, while their meals will be 50 percent deductible, just like under the old law,” he says. “However, what has changed is if that employee takes out a customer and flips for dinner; under the new definitions, that dinner is deemed ‘entertainment’ and thus is nondeductible.”
This is under intense scrutiny right now, says Kangas, who points out under the old code that if two business colleagues went out to lunch to discuss business, these meals were 50 percent deductible.
“There has been a difference of opinion in this area, some people believe that if you are discussing business this should be 50 percent deductible,” he says. “Some people believe you can still write this off as a 50 percent deduction, while others are saying it’s no longer deductible.”
At meetings and events, where a company sponsored a breakfast, for example, it remains unclear whether that sponsorship could be written off as a business expense. If this change is interpreted in black-and-white terms, it may not be. But Kangas expects the IRS to release guidelines that clarify murky situations such as the one above.
Forget floor seats to a Lakers game or frontrow tickets to “O” by Cirque du Soleil on another company’s dime. Under the new tax law, businesses can no longer deduct these entertainment expenses.
Under the old tax code, 50 percent of entertainment expenses were deductible. That is no longer the case, Kangas reports.
“This piece of the law is black and white,” he says. “If you take a prospect out to the ballgame or for a round of golf, under the new law this is a nondeductible expense.”
The good news is sending an employee to an event, seminar or conference will remain 100-percent deductible. However, if that employee then takes a potential client out for a night on the town, those expenses will not be.
“The days of, ‘Oh, we have a free day, let me spring for a round of golf’ may be over,” he says.
When a meeting or event includes a golf tournament and charges participants $100 per player to participate, participants can no longer write off this expense—and it’s important for meeting and event planners to take note of that. “That will fall into the category of entertainment,” says Kangas.
One thing that hasn’t changed is the importance of good recordkeeping, says Kangas. Businesses should keep all documentation pertaining to their expenses for travel, meals and entertainment, should anything be called into question in the future.
“The IRS requires you to have documentation to support your items of income or deductions,” he says. “If an employee attends a week-long seminar, they will need to maintain all of that documentation to support the deductions they take. This includes receipts for meals, the hotel, the airfare, the taxi or rental car and the cost of the conference itself.”
When it comes to managing tax concerns in any year, be wary, be wise—and check with your trusty accountant.