Entertainment Expenses – No Longer Deductible
Under TCJA, entertainment expenses incurred on or after Jan. 1, 2018, are nondeductible. Prior to the most recent tax law changes, entertainment expenses were 50% deductible to the extent that they were directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discussion, associated with, the active conduct of a trade or business. Detailed regulations further defined when this could occur.
Beginning in 2018, U.S. taxpayers will no longer be funding a portion of these entertainment costs through tax incentives as the new law makes all entertainment expenses nondeductible.
IRS Adjusts Health Savings Account (HSA) Limits For 2018, Announces 2019 Limits
Taxpayers will be allowed to treat $6,900 as the annual contribution limitation for family coverage under High Deductible Health Plan (HDHP) instead of the $6,850 limitation announced previously.
For 2019, the annual limit on deductible contributions is $3,500 for individuals with self-only coverage under an HDHP (a $50 increase from 2018) and $7,000 for family coverage (a $100 increase from 2018).
The limits on annual deductibles are also subject to annual inflation adjustments. For 2019, the lower limit on the annual deductible for an HDHP is $1,350 for self-only coverage and $2,700 for family coverage, both unchanged from 2018. The upper limit for out-of-pocket expenses is $6,750 for self-only coverage and $13,500 for family coverage, both increased from 2018.
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Foreign-derived Intangible Income Deduction:
Tax Reform’s Overlooked New Benefit For U.S. Corporate Exporters
One new opportunity is the foreign-derived intangible income (FDII) deduction in Sec. 250(a). For U.S. C corporations that sell goods and/or provide services to foreign customers, this deduction reduces the effective tax rate on qualifying income to 13.125%.
The new benefit to U.S. C corporations is for using U.S.-based intangible property that they’ve owned all along. They don’t have to patent, copyright, or even identify the intangible property as the benefit is derived from a deemed return on assets calculation. Because FDII is intertwined with global intangible low taxed income (GILTI), many believe it is simply an international tax provision and fail to see the benefits to U.S. exporters with no foreign operations.
The clear beneficiaries of these new provisions are U.S.-based corporate exporters of goods and services with no controlled foreign corporation (CFC) ownership. These corporations have long been subject to higher tax rates than their multinational competitors that have been able to move intellectual property outside the United States to lower tax jurisdictions. The FDII deduction is a big step toward eliminating this tax advantage. Furthermore, because FDII does not require the taxpayer to identify intangible assets, it avoids cumbersome and expensive valuation and segregation studies and other complex legal and tax undertakings.
FDII currently only applies to C corporations, including U.S. subsidiaries of foreign-based multinationals that are taxed as C corporations. FDII is not available for S corporations, real estate investment trusts, partnerships, limited liability companies, and individuals. The IRS has not yet issued any technical guidance on the FDII deduction.
The New Sec. 199A Business Income Deduction
- Sec. 199A allows taxpayers other than corporations a deduction of 20% of qualified business income earned in a qualified trade or business, subject to certain limitations.
- The deduction is limited to the greater of (1) 50% of the W-2 wages with respect to the trade or business, or (2) the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (generally, tangible property subject to depreciation under Sec. 167). The deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.
- Qualified trades and businesses include all trades and businesses except the trade or business of performing services as an employee and “specified service” trades or businesses: those involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business’s principal asset is the reputation or skill of one or more owners or employees.
- Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are effectively connected with the conduct of a business in the United States. However, some types of income, including certain investment-related income, reasonable compensation paid to the taxpayer for services to the trade or business, and guaranteed payments, are excluded from qualified business income.
The W-2 wage limitation does not apply to taxpayers with taxable income of less than $157,500 for the year ($315,000 for married filing jointly) and is phased out for taxpayers with taxable income above those thresholds. Income from specified service businesses is not excluded from qualified business income for taxpayers with taxable income under the same threshold amounts.