Submitted by Richard Allen, EA, AFSP
Starting with 2018 tax returns, the Tax Cuts and Jobs Act (TCJA) eliminated most business itemized deductions on 1040 Schedule A. TCJA eliminated all employee business expenses (such as auto expense, union dues, job expenses) and also investor business expenses such as broker asset management fees.
Most (but not all) business expenses for 1040 Schedule C, E, F, Forms 1065, 1120, 1120-S, and 4835 continue to be deductible under TCJA.
When in doubt, refer to the IRS Publications for the type of expense, or to the IRS instruction for a specific form. HINT: Go to www.irs.gov and download specific publications or forms and instructions to your computer. You can then open the form in Adobe pdf and search for a word by pressing “[Ctrl] F”.
I continually see clients and tax practitioners get confused by these rules that were changed for 2018 and beyond. There is also continuing confusion about some business expenses that were not changed – but are still misunderstood. Here are some guidelines:
A. Entertainment Expenses ARE GENERALLY NO LONGER DEDUCTIBLE. GONE are tickets to any entertainment events: Movies, Theater Tickets, Baseball or other sporting events, Golf fees, and dues for country clubs, leisure activities, fitness clubs and a wide variety of other activities used for sales or business promotion.
B. Business Meals ARE DEDUCTIBLE if properly documented. 50% of Food and beverages can be deducted IF THEY ARE SEPARATELY STATED from an Entertainment Event. Food at a sporting event may be deducted if separately paid. Skybox food and drinks can be deduced if separately from the skybox ticket fees. CAUTION: Two types of records to keep (these requirements have not changed):
1. A record to record the following (whether in the form of a diary or computer log, or some other format):
- Date and time of event.
- Cost of meals and beverages separately stated for tax years 2018 and beyond. (For tax year 2017 and prior, this rule does not apply.)
- Business purpose.
- Name of business associate(s).
- Relationship of individual(s) (i.e. customer, client, potential customer, employee).
2. Receipts, itemized paid bills and other expenses of $75 or more. However, a receipt or statement for lodging is needed regardless of amount.
C. Contributions to charitable events ARE POSSIBLY DEDUCTIBLE as 1040 Schedule A Itemized Deductions. (Contributions from a business are not deductible on 1040 Schedules C, E, F.) There are some different rules here:
1. Most organizations other than churches and governments must apply to the IRS to become a qualified organization.
2. Donations to Section 501(c)(3) public charities are deductible on Schedule A if there are enough itemized deductions to make this worthwhile.
3. Deductions for church and non-profit school events would be a charitable deduction if they specify the amount of the event fee which would be considered a contribution. (Meal costs at such events are usually not deductible for charitable purposes.) Also, contributions made for the right to purchase tickets for college and university athletic events are not deductible.
4. Deductions to many social welfare and civic organizations registered under section 501(c)(4) don’t qualify.
5. However, two types of 501(c)(4) organizations—veteran’s organizations with 90% war vet membership and volunteer fire departments—do qualify for charitable deductions.
6. GoFundMe contributions are rarely deductible. Fund raising for specific families or persons, or for charities not registered with the IRS under 501(c)(3) are not deductible.
7. Deductions by phone or mail to many charities are often not deductible. Many of these are scams. The only deduction allowed would be if there was a receipt from the actual charity indicating the charity was registered with the IRS.
8. Political campaign contributions to candidates or political parties are never deductible, nor are payments for related golf or sporting events. We still see these often!!
D. Home Office Deductions are allowed for many businesses such as 1040 Schedule C. Generally, a taxpayer can deduct business expenses that apply to a part of a home only if that part is exclusively used on a regular basis:
• As the principal place of business for any of the trades or businesses;
• As a place of business used by patients, clients, or customers to meet or deal with in the normal course of the trade or business; or
• In connection with the trade or business if it is a separate structure that is not attached to the home.
• Exceptions to this rule apply to space used on a regular basis for storage of inventory or product samples, and certain daycare facilities.
• The home office must be used exclusively and regularly for administrative or management activities of the trade or business.
• There is no other fixed location where the taxpayer conducts substantial administrative or management activities of the trade or business.
E. Auto expenses. Transportation expenses include the ordinary and necessary costs of all of the following.
• Getting from one workplace to another in the course of the business or profession when traveling within the city or general area that is the tax home.
• Visiting clients or customers.
• Going to a business meeting away from the regular workplace.
• Getting from the home to a temporary workplace when there is one or more regular places of work. These temporary workplaces can be either within the area of the tax home or outside that area.
• Daily transportation expenses incurred while traveling from home to one or more regular places of business are generally nondeductible commuting expenses. Picking up or dropping off supplies are deductible only to the extent they exceed the normal commuting expenses.
F. Auto with a home office situation. If the taxpayer has a home office in the residence as the principal place of business and the taxpayer incurs expenses going between the residence and another work location in the same trade or business, regardless of whether the work is temporary or permanent and regardless of the distance, then the transportation between the home office to the other work location is 100% auto travel expenses.
G. Many auto expense rules. It is beyond the scope of this article to discuss various other auto expense tax issues including:
• Actual auto expenses vs. Auto Mileage allowance (at 58 cents per mile for 2019, 57.5 cents for 2020). Recordkeeping is required for either option.
• Buy vs. Lease.
• Auto mileage vs. actual expenses.
• Depreciation rules and recapture.
• Sale or trade in of business auto.
• Many business owners miss deducting the following expense of a business auto. (These are deductible in addition to the mileage allowance.)
-Interest on car loan.
-Business related parking expenses.
-Business related tolls.