Spring 2018 issue of Horizons

Meal and entertainment expenses provided to the general population of employees remains 100% deductible. An example of this type of expenditure is a company holiday party. Property Expensing and Depreciation Bonus depreciation, the accelerated depreciation method available to taxpayers over the past few years, was increased from 50% to 100% of the asset acquisition cost of qualified property for property purchased and placed in service after September 27, 2017. In addition, the property that qualifies for bonus depreciation now includes both new and used property. Property that qualifies for bonus depreciation includes personal property and qualified improvement property. Qualified improvement property is defined as any improvement to an interior portion of a nonresidential building if the improvements are made after the date the related building was first placed in service. The section 179 expensing rules were modified to allow a maximum expense amount of $1 million. The amount that may be expensed under section 179 is reduced dollar- for-dollar to the extent that the total cost of section 179 property acquired in the tax year exceeds $2.5 million. As such, a taxpayer with $3.5 million or more of section 179 property additions in a tax year does not qualify for section 179 expensing that tax year. The definition of section 179 property was broadened to now include qualified improvement property (defined above) and certain improvements (roofs, HVAC systems, fire protection and alarm and security systems and security systems made to nonresidential real property and placed in service after the date the realty was placed in service). Business Interest Deduction Limitation For tax years beginning after December 31, 2017, the net interest expense deduction for the taxpayer will be limited to 30% of the business’s adjusted taxable income.

Expenses for entertainment, amusement or recreation expenses are no longer 50 % deductible.

Adjusted taxable income for the 2018 through 2021 tax years is generally defined as tax basis earnings before interest, taxes, depreciation and amortization — or tax basis EBITDA for tax years after 2021, adjusted taxable income is generally defined as tax basis earnings before interest and taxes (or tax basis EBIT). The interest deduction limitation disallowance occurs at the filer level, not at the owner level. Businesses with less than $25 million in average annual gross receipts (defined below) are exempt from this limitation. Pass-Through Entity Deduction Partnerships, S corporations and sole proprietorships that are not considered service businesses are eligible for a new pass-through tax deduction of up to 20% of domestic qualified business income (QBI). The deduction is generally limited to the greater of 1) 50% of W-2 wages paid with respect to the qualified trade or business or 2) the sum of 25% of W-2 wages paid plus 2.5% of the unadjusted basis of all qualified property. Service businesses are generally not eligible for the 20% pass-through deduction. Any interest disallowed can be carried forward as a tax deduction indefinitely. QBI is defined as all domestic business income other than investment income.

The definition of a service business is currently “Any trade or business involving

Spring 2018

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