The Tax Cuts and Jobs Act got rid of the deduction for any expenses related to activities typically considered to be for entertainment, amusement or recreation. It also restricted the deduction for expenses related to food and beverages offered by employers to workers.

The regulations proposed Monday by the IRS eliminates the deduction for expenditures related to entertainment and give guidance to figure out whether an activity is considered to be entertainment. The proposed rules also deal with the limitation on the deduction of food and beverage expenses.

The proposed regulations can have an impact on taxpayers who pay or incur expenses for meals or entertainment. Some common examples of deductible meals and entertainment include: a company-wide party for employees (such as holiday parties), or when foods and beverages are provided free of charge for public events. Some examples of meals and entertainment that will be 50% deductible include: a non-lavish meal with a client where business is discussed, employee meals while traveling, and meals for board meetings.  However, expenses for entertaining clients, such as concert tickets or golf outings are non-deductible. 

The proposed rules note that while the Tax Cuts and Jobs Act eliminated the deduction for entertainment expenses, Congress didn’t amend the provisions relating to the deductibility of business meals. That means taxpayers can generally continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business, including meals consumed by employees on work travel. However, no deduction is permitted for the expense of any food or beverages unless the expense is not lavish or extravagant under the circumstances, and the taxpayer (or the taxpayer’s employee) is present while the food or beverages are being provided.

For more information visit https://www.accountingtoday.com/news/irs-proposes-new-rules-for-deducting-meals-and-entertainment  and https://bench.co/blog/tax-tips/deduct-meals-entertainment/

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1. Know if you will take the standard deduction

It’s important to know whether you expect to take the standard deduction before making decisions on year-end spending that would normally generate itemized deductions.  Tax reform doubled the standard deduction while repealing or limiting numerous itemized deductions, leaving millions fewer taxpayers claiming actual itemized deductions.

 If your itemized deductions are unlikely to total at least $12,200 (or $24,000 if married and filing jointly), you will not get any deduction for things like charitable gifts or elective health care procedures.

2. Maximize “above-the-line” deductions

Above-the-line deductions are especially valuable because so many taxpayers will no longer itemize deductions. They also reduce the taxpayer’s adjusted gross income, and AGI affects whether they’re eligible for many tax benefits.

Common above-the-line deductions include traditional individual retirement account and health savings account contributions, self-employment taxes, certain health insurance costs and any bank penalties you may have had to pay for early account withdrawals.

Note that tax reform repealed some popular above-the-line deductions, such as moving expenses (except for members of the military) and alimony payments (for divorces finalized after 2018).

3. Leverage retirement account tax savings

It’s not too late to maximize contributions to a retirement account. Traditional retirement accounts like 401(k)s and IRAs still offer some of the best tax savings in the Tax Code.  Contributions reduce taxable income at the time a taxpayer makes them, and they don’t pay taxes until the money is taken out at retirement.

The 2019 contribution limits are $19,000 for a 401(k) and $6,000 for an IRA (not including the $1,000 catch-up contributions for those 50 years old and older). Remember that 2019 contributions to an IRA can be made as late as April 15, 2020

4. Defer tax

Deferral remains a cornerstone of good tax planning.  Why pay tax today when you can put if off until tomorrow and enjoy the time value of money? Deferring tax is about accelerating deductions and postponing income.  You may be able to control the timing of items of income and expense.  Consider deferring bonuses, consulting income, or self-employment income.

On the deduction side, you may be able to accelerate charitable contributions (also known as “bunching”), state and local income taxes, interest payments and real estate taxes, but keep in mind the $10,000 cap on deducting tax, and whether or not you will be using the standard deduction. 

5. Plan for the new version of the “kiddie tax”

Tax reform repealed the old “kiddie tax,” which generally taxed the unearned income of children at parents’ marginal rates.  Now a child’s unearned income is taxed at trust and estate rates.  The change cuts both ways.  For some low- and middle-income families whose children receive unearned income like scholarships or military survival benefits, the trust and estate rates are much less favorable than their parents’ tax brackets.  For some high-income families, the ability to use the trust tax brackets may allow their children to enjoy more capital gains and qualified dividends in the zero and 15 percent brackets.

Consider whether it may benefit you to transfer assets earning investment income to children, but beware of the gift tax consequences and watch for changes in law.  The House has passed legislation restoring the old “kiddie tax” regime, and retroactive enactment is a possibility.

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