Tax law holds small-busi­ness jolt

Own­ers find breaks some­times come with loss of de­duc­tions

Arkansas Democrat-Gazette - - BUSINESS & FARM - JOYCE M. ROSEN­BERG

NEW YORK — As small busi­ness own­ers com­pile their in­come tax re­turns, they may have an un­pleas­ant sur­prise — some pop­u­lar busi­ness de­duc­tions have dis­ap­peared or been re­duced un­der the new tax law.

While the law gave small busi­ness own­ers new tax breaks in­clud­ing a 20 per­cent de­duc­tion in in­come for many sole pro­pri­etors, part­ners and own­ers of S cor­po­ra­tions, Congress took back de­duc­tions for en­ter­tain­ment ex­penses, em­ployee tran­sit ben­e­fits and what are called net op­er­at­ing loss car­ry­backs. It also put ceil­ings on in­ter­est de­duc­tions for some busi­nesses. Ac­coun­tants and tax at­tor­neys sus­pect small busi­ness clients to es­pe­cially miss the break for en­ter­tain­ing clients and cus­tomers.

“I think they’re go­ing to be shocked at how much more they didn’t get as a de­duc­tion,” said Joseph Perry, a cer­ti­fied pub­lic ac­coun­tant with Mar­cum in Melville, N.Y.

A look at the dis­ap­pear­ing de­duc­tions:


There is now a limit on how much in­ter­est busi­nesses can deduct on their loans and credit lines. While the small­est busi­nesses, those with up to $25 mil­lion in av­er­age an­nual rev­enue over the pre­vi­ous three years, have no ceil­ing on the in­ter­est they can deduct, there are many small busi­nesses above that thresh­old that are be­ing af­fected. IRS reg­u­la­tions limit the de­duc­tion to 30 per­cent of a com­pany’s ad­justed tax­able in­come plus its in­ter­est in­come, if it has any. A mo­tor ve­hi­cle dealer can also deduct its bor­row­ing costs for the ve­hi­cles it buys and then sells — what’s known as floor plan fi­nanc­ing in­ter­est.

But in­ter­est ex­penses that are above the limit can be car­ried over and de­ducted the next year; they will count to­ward that year’s ceil­ing. And real prop­erty busi­nesses in­clud­ing land­lords, de­vel­op­ers and real es­tate man­agers and bro­kers can choose to be ex­empt from the de­duc­tion if they fol­low rules on de­pre­ci­a­tion of their prop­erty.


Own­ers who take cus­tomers to sport­ing events or the theater or treat them to a round of golf will have to foot the en­tire bill for those ac­tiv­i­ties. The new law has done away with the en­ter­tain­ment de­duc­tion for busi­nesses. Many own­ers use en­ter­tain­ment as a key part of build­ing and main­tain­ing re­la­tion­ships with clients.

But own­ers can still deduct the cost of tak­ing a client out for break­fast, lunch or din­ner; half the amount spent for a busi­ness meal is de­ductible. The IRS also says own­ers can buy food for a cus­tomer at an en­ter­tain­ment event as long as the food is paid for sep­a­rately. In a no­tice about meals and en­ter­tain­ment ex­penses is­sued in Oc­to­ber, the agency used hot dogs at a base­ball game as an ex­am­ple. The food is de­ductible; the tick­ets are not.

Own­ers can also deduct 100 per­cent of the cost of food at par­ties or pic­nics for em­ploy­ees.

While the loss of the en­ter­tain­ment de­duc­tion may dis­cour­age some own­ers from treat­ing cus­tomers to tick­ets or a golf game, oth­ers will de­cide that pay­ing for en­ter­tain­ment is a worth­while in­vest­ment in their com­pa­nies’ fu­ture be­cause of the good­will it cre­ates. That’s good busi­ness sense, said Ken Ru­bin, a CPA with Ru­bin Brown in St. Louis.

“Nor­mally, our gen­eral state­ment is, don’t let tax con­sid­er­a­tions drive the busi­ness de­ci­sions,” Ru­bin said. Or, as tax ad­vis­ers some­times tell their clients: Don’t let the tax tail wag the dog.


The law also elim­i­nated the de­duc­tion own­ers could take for sub­si­diz­ing their em­ploy­ees’ com­mut­ing costs. Sim­i­lar to their de­ci­sions about en­ter­tain­ment ex­penses, own­ers must de­cide whether they want to con­tinue giv­ing em­ploy­ees money to­ward their mass tran­sit fares or park­ing tabs; given the tight la­bor mar­ket, own­ers might want to con­tinue pro­vid­ing the ben­e­fits to make their com­pa­nies bet­ter able to com­pete for tal­ented work­ers. And tak­ing the ben­e­fit away could be a morale­buster, said Leon Dutkiewicz, a CPA with Citrin Coop­er­man in Philadel­phia.

“When you run the math, you’re go­ing to lose more in good­will than you would from los­ing the de­duc­tion,” he said.

Em­ploy­ees also lost a pop­u­lar de­duc­tion — for job-re­lated ex­penses like the cost of tools, uni­forms and pub­li­ca­tions re­lated to their work. Own­ers who want to give their em­ploy­ees a break might want to take on those ex­penses and deduct the costs.


Busi­nesses that lose money no longer have the abil­ity to “carry back” their losses to off­set earn­ings in pre­vi­ous years and get re­funds on taxes they paid. The law does al­low com­pa­nies to carry losses for­ward to an un­lim­ited num­ber of fu­ture years, help­ing them re­duce taxes dur­ing prof­itable times.

Although the ab­sence of car­ry­backs takes away some flex­i­bil­ity for busi­nesses, it isn’t likely to be an is­sue for com­pa­nies in a strong econ­omy when busi­nesses are do­ing well, Ru­bin said. It can, how­ever, be an is­sue for com­pa­nies like restau­rants and re­tail­ers.

“It’s a big­ger deal for cycli­cal-type busi­nesses that will make money one year, lose money the next,” Ru­bin said.


The In­ter­nal Rev­enue Ser­vice guid­ance says busi­nesses’ en­ter­tain­ment de­duc­tions now need to be bro­ken down: A hot dog at a ball­park, for in­stance, is de­ductible, but the ticket to the game is not.

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