The Tax Cuts and Jobs Act affects almost every business taxpayer with respect to guidelines and the deductibility of certain expenses. We recognize that this tax law has added significant complexity to many business owners.
Our focus, at DePretis CPAs, is on easing that burden for you. The following are a few important reminders before the year comes to an end.
Fringe Benefits
Businesses are subject to special rules regarding employee fringe benefits. Under these rules, any S corporation shareholder-employee with a 2% or greater ownership is taxed on any fringe benefits received. These types of benefits include:
Health insurance paid by the corporation
Life insurance premiums on a policy paid by the corporation for the shareholder
The fair market value of any personal auto use of a business auto owned by corporation
Benefits provided under a cafeteria plan
These amounts need to be added to the shareholder-employee’s W-2 wages in 2018. If you have an outside service preparing your W-2's, remember to provide these amounts to them before the last payroll of the year.
Wages to Shareholders-Employees
Year-end is the best time to review the reasonableness of the wages paid to shareholder-employee. If your wages are less than the fair value of your services to the corporation, the IRS may re-characterize distributions as wages and assess FICA and Medicare taxes, along with penalties and interest. Please call us if you need guidance on determining a fair wage for your services.
Shareholder Distributions for S Corporations
As you close in on the end of the year, please assess the distributions paid throughout the year to ensure these are proportionate to shareholder ownership. If these are out of proportion, please call us to establish a plan to correct the distributions. Also, as a general guideline, distributions for the year should not exceed net income in order to avoid possible taxable long-term capital gain distributions.
Home Office Deduction
Tax reform has eliminated the employee (W-2) home office deduction by taking away the ability to claim miscellaneous itemized deductions. However, if you are self-employed, nothing has changed, as you can claim the deduction of your Schedule C as you used to. If you are an S corporation shareholder or LLC member, rent can be charged to the business and declared as rental income on Schedule E of your individual tax return. Besides paying yourself rent, the IRS has recommended an additional method for home office deductions (this is for those shareholders-employees who use their home as the principal place of business): The employee is to submit an expense report as part of what is called an “accountable plan”. The plan describes how the business is to reimburse employees for expenses, including the use of their home for work purposes. This method allows for a legitimate business deduction and preempts the reimbursement from being included in the employee’s income. Please refer to IRS Publication 587 (Business Use of Home) for more information.
Expense Reimbursement
Any expense reimbursements to an employee (including owners) not requiring a substantiation of the expenses is required to be included as wages to the employee. This also applies to per diem payments to employees and business use of autos. To avoid wage treatment, have your employees submit expense reimbursement forms for reimbursement of the expenses. (See requirements for business meals, travel and entertainment deductions below.)
Meals and Entertainment
Under the new tax law, most entertainment is no longer deductible even if a substantial and bona fide business discussion is associated with the activity. These include golf outings, sporting events, theater tickets, fees paid to sporting arenas, golf club dues, etc.
The only entertainment expenses that are still 100% deductible are expenses for recreational, social, or other similar activities primarily for the benefit of employees, such as a Christmas party, annual picnic, summer outing, or related facility costs.
De minimis meals provided to employees for the convenience of the employer are now subject to the 50% limitation instead of the previously 100% deduction.
50% of business meals (such as for meetings and travel) are still generally deductible if the taxpayer is present and the food or beverages are not considered lavish or extravagant.
Maximize tax deductions and save time accumulating information for the tax return by setting up separate general ledger accounts for the above-mentioned categories: Entertainment (non-deductible); Qualified recreational/social employee expenses (100% deductible); De minimis meals provided to employees for the convenience of the employer (50% deductible) and Business meals (50% deductible)
Business Travel
Travel expenses while away from home for a business purpose can include airfare, other transportation, lodging, etc. The documentation requirements apply to these types of expense.
The cost of meals deducted for a self-employed person is limited to the per diem allowance. These per diem rates are dependent on the city of travel and can be found on the internet at www.gsa.gov. Documentation consists of the time, place and business purpose for the day or period of days the payment represents
Auto expense deductions. If you want assurance your auto expenses will be allowed in an audit, we strongly encourage the use of a log to document business versus personal miles. The IRS does allow a sampling method. This means you can diligently keep a log of your miles during a representative period during the year and use the results for the entire year. Mileage log books are available at office supply stores. In addition, there are mobile apps available to log each trip you take.
1099-MISC Reporting Requirements
The due date for employers to send the form 1099-MISC to the IRS and the recipients is January 31, 2019. A Form 1099-MISC is required for vendors (unless a corporation) to whom you have paid at least $600 during the year in the following: rents, services performed by a non-employee, prizes and awards, other income payments, medical and health payments, and payments to an attorney (no exception for corporations). Credit card payments to vendors are excluded from the Form 1099 reporting. You may want to consider having each vendor complete a Form W-9 to ensure you have the proper identification number and addresses in order to process the 1099s in a timely fashion. If you need assistance in preparing these forms, please contact our office.
Physical Inventory
The IRS continues to place an increased emphasis on actual physical inventory on hand at December 31. Please make sure to physically count your inventory, retain the records, and provide us with the accurate total cost (not market value) of inventory on hand at December 31, 2018. Do not include consignments you are holding from other people in this number. In the event of an audit you must be able to provide copies of physical count sheets, so we are this year placing an increased emphasis upon obtaining correct year end physical inventory amounts.
Please let us know if you have questions regarding items to consider before the year ends.
925-600-8500
talk2us@depretis-cpa.com