Ouch! Some business owners may be shocked by lost tax breaks

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,” says Joseph Perry, a certified public accountant with Marcum in Melville, New York.

A look at the disappearing deductions:

Interest

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.

Entertainment

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

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ERIC RISBERG - THE ASSOCIATED PRESS FILE PHOTO In this Nov. 23, 2013 file photo, a server fills wine glasses in St. Helena, Calif. While the new tax 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.