Tax Reform Allows Bigger Vehicle Deductions

Finally, lawmakers did the right thing by increasing the luxury auto depreciation limits on business cars. The old luxury limits were unrealistic, punitive, unfair, and discriminatory against any car that cost more than $15,800. The new limits don’t create parity in all respects, but they are a big improvement.

If you bought a car in 2017 and paid more than $15,800, you were driving a luxury car that lawmakers punished you for by putting a lid on your depreciation. For example, say in 2017 you bought a $40,000 car and drove it 100 percent for business. Your maximum depreciation deductions for the first five years would total only $15,060. To fully depreciate this car under the old rules would have taken 19 years.

It was ridiculous to take 19 years to depreciate that $40,000 car. And now, finally, lawmakers have fixed a big part of what the tax code calls “luxury automobile limits.” Under the new law, this $40,000 vehicle is fully depreciated in six years. Think about that: old law, 19 years. New law, six years. Essentially, the new law sets the so-called luxury automobile limit at $50,000. This means any vehicle that costs $50,000 or less is not penalized by the luxury vehicle limits when you’re using MACRS depreciation.

Under the new law, the annual limits are

• Year 1: $10,000
• Year 2: $16,000
• Year 3: $9,600
• Year 4 and each succeeding year: $5,760

What do the new limits mean? Before 2018, many business taxpayers were buying vehicles with gross vehicle weight ratings (GVWRs) greater than 6,000 pounds to escape the draconian luxury limit of roughly $15,000. Even today, SUVs, crossover vehicles, and pickup trucks can avoid the automobile luxury limits and even qualify for immediate write-offs of the full business cost using bonus depreciation or Section 179 expensing. Cars don’t qualify for unlimited bonus depreciation or any added benefits from Section 179 expensing - only SUVs, crossovers, and pickup trucks qualify.

But the big deal is that because of the higher, more realistic luxury auto limits, there’s far less need to buy the bigger, heavier SUV or crossover vehicle. With a car costing $50,000 or less, you realize 71.2 percent of your total vehicle depreciation deductions in the first three years.

No matter what vehicle you drive for business, you MUST keep a mileage log to determine the percentage of business to personal use.

Have questions about tax reform? Give us a call at (610) 863-8347 today for a free consultation!

Tax Reform Destroys Entertainment Deductions

Tax Reform Destroys Entertainment Deductions for Businesses

First, lawmakers reduced the directly related and associated entertainment deductions to 80 percent with the 1986 Tax Reform Act. Later, in 1993, they reduced that 80 percent to 50 percent. 

And now, with the newest tax reform, lawmakers simply killed business deductions for directly related and associated entertainment effective January 1, 2018.

For example, during 2017, you could take a prospect or client to a business dinner followed by the theater or a ballgame and deduct 50 percent of all the monies spent, provided you passed some tax law tests on business discussion and associated entertainment.

Now, in what you and I thought was a business-friendly tax reform package, you find that lawmakers exterminated a big chunk of business entertainment. You can no longer deduct entertainment that has, as its mission, the generation of business income or other specific business benefit. 

The 2018 tax reform prohibition against deductible entertainment is true regardless of your business discussion, negotiation, business meeting, or other bona fide transaction.

Here’s a short list of what died on January 1, 2018, so you can get a good handle on what’s no longer deductible:

• Business meals with clients or prospects
• Golf
• Skiing
• Tickets to sports games—football, baseball, basketball, soccer, etc.
• Disneyland

Entertainment That Survived Tax Reform

As just discussed above, you may no longer deduct directly related or associated business entertainment effective January 1, 2018.

Common forms of directly related and associated entertainment that are no longer deductible include business meals with clients or prospects, golf, football games, and similar business-building activities.

That’s the bad news. The good news is that tax code Section 274(e) pretty much survived the entertainment bloodletting. Under this section, you continue to deduct:

• entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
• expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees);
• expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
• expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
• expenses for goods, services, and facilities you or your business makes available to the general public;
• expenses for entertainment goods, services, and facilities that you sell to customers; and
• expenses paid on behalf of nonemployees that are includable in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

When you are considering using the above survivors of tax reform’s entertainment cuts, you will find good strategies in the following:

1. Renting your home to your corporation.

2. Taking your employees on an employee party trip.

3. Partying with your employees.

4. Making your vacation home a deductible entertainment facility.

5. Creating an employee entertainment facility.

6. Deducting the entertainment facility, because facility use creates compensation to users.

If you would like our help implementing any of the strategies above, please don’t hesitate to contact us at (610)863-8347 for a free consultation.