The Tax Cuts and Jobs Act (TCJA) tax reform has left many taxpayers confused about what is and what is not deductible for the upcoming 2018 tax year. Smith Schafer has a team of transportation experts ready to answer your questions. Below are some common deductions the transportation industry may see this year:
1. Meals & Entertainment
Under the TCJA, transportation company owners may deduct 50 percent of food and beverage related to operating a trade or business, with a couple conditions:
- The expense is not lavish or extravagant under the circumstances.
- The taxpayer is present when the food or beverages are furnished.
Note: Expenses related to entertainment, amusement, or recreation no longer fall under the 50 percent deduction. The Internal Revenue Service (IRS) will not allow the entertainment disallowance rule to be circumvented through inflation of food and beverage costs.
Example: If a trucking company owner treats a current or potential business client, consultant, or other business contact to a suite at a sporting event, such as a Vikings game, the food and beverage provided during this entertainment activity is deductible. The cost of the food and beverage is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
Exception to the Rule: Expenses related to business meetings for employees, stockholders, agents or directors are fully deductible. Therefore, entertainment expenses related to meetings, activities, or events for the benefit of employees are fully deductible. This may include events such as shareholder meetings, holiday parties, and summer outings. As long as these events remain as COMPANY ONLY functions, these rules should apply.
2. Per Diem Methods for Substantiating Meals & Lodging Expenses
A transportation company owner must substantiate the amount, time, place, and business purpose of expenses paid or incurred while travelling away from home. The IRS has provided per diem allowances under which the amount of meals and incidental expenses (M&IE) may be deemed to be substantiated. The per diem allowances eliminate the need to substantiate actual costs. However, the owner, using the per diem allowances, still needs to have adequate records for documenting time, place, and business purpose.
Three per diem allowance methods:
- Lodging plus M&IE, which provides a per diem allowance to cover lodging as well as meals and incidental expenses.
- M&IE only, which provides a per diem allowance for meals and incidental expenses only.
- Incidental expenses only, which is used when no meal or lodging expenses are incurred.
Any reimbursement exceeding the relevant federal per diem rates for the type of allowance, must be included in the employee’s (or independent contractor’s) gross income and be reported on the employee’s form W-2, subject to withholding.
A per diem allowance for M&IE may only be used to substantiate an employee’s or other payee’s M&IEs for purposes of the employer’s return. The amount deemed to be substantiated is equal to the lesser of the per diem allowance or the amount computed at the federal M&IE rate for the locality of travel for the period that the employee is away from home. If M&IEs are substantiated using a per diem allowance, the entire amount is treated as a food and beverage expense, which is subject to the 50 percent limitation on meals and entertainment.
3. Accelerated Depreciation
Under TCJA, the purchase on or after September 27, 2017 of qualifying assets, both new and used, with an asset life of 20 years or less, will qualify for 100 percent bonus depreciation. Transportation company owners may also elect to expense these purchases under Code Section 179. Owners may expense up to $1 million of new or used business assets. This limit is phased-out once more than $2.5 million worth of assets are placed in service during the year. Code Section 179 expenses cannot exceed taxable income of the business. Bonus depreciation does not have this stipulation.
4. Repairs & Maintenance
Expenses to keep tangible property in good working order that do not prolong the useful life of the asset are generally deductible as repair and maintenance costs. However, transportation company owners may elect to capitalize certain repair expenses. If repair expenses qualify as an improvement expense, the expense must be capitalized.
Example: If a direct repair cost results in the betterment, restoration, or adaptation to a new or different use of the property, the expense should be capitalized.
5. De Minimis Expensing Safe Harbor
A transportation company owner may make an election for a de minimis safe harbor expense to not capitalize amounts paid or incurred of no more than $2,500 during the tax year to acquire or produce a unit of tangible property. Amounts qualifying for the de minimis safe harbor may be currently deducted, if they are otherwise deductible business expenses.
6. Health Insurance Expenses
For S-Corporations, owner-employee taxpayers, who own more than 2 percent of the S-Corporation stock, may deduct 100 percent of the amount paid for medical insurance for himself or herself, a spouse, and dependents under the health plan established by the S-Corporation.
A more than 2 percent shareholder’s wages from an S-Corporation are treated as the shareholder’s earned income. A deduction for health insurance premiums may not exceed an individual’s earned income from the trade or business. Certain exceptions apply to group health plans.
State tax laws may differ from the related Federal tax laws described above. Since there have been significant changes over the past year, it is important to work with a qualified advisor to help you leverage these tax opportunities. Smith Schafer is a recognized leader in providing tax, accounting, auditing and consulting services to the transportation industry since 1971. Our Transportation Group is committed to serving over 80 Minnesota transportation entities and stays on top of industry issues, trends, tools and technologies to ensure we give you the best possible advice. For additional information, click here to contact us. We look forward to speaking with you soon.