Ref: IRS Notice 2018-76

The IRS has given needed guidance regarding IRC Section 274 after implementation of the Tax Cuts and Jobs Act (TCJA).  In summary:

1. All business entertainment, recreation or amusement continues to be non-deductible.

Meals: A 50% deduction is now allowed for:

1. food and beverages for employees (e.g. movie locations)
2. meals reimbursed for employee travel or taking a client to a meal
3. recreational meals for employees (e.g. holiday party)
4. employee and/or stockholder meetings
5. business leagues (e.g., Chamber of Commerce)
6. items available to the public (e.g. realtor open house)

Requirements: In all of the above, the meal must have ALL FIVE of the following:

1. Be ordinary and necessary in carrying on the trade or business
2. Not be lavish or extravagant
3. The taxpayer or employee must be present at the furnishing of the food or beverages
4. The food or beverages are provided to a current or potential business customer, client, consultant or similar business contact
5. Must be purchased separately from entertainment.  Example: If an entertainment includes food and beverages not separately stated, then the entire change is disallowed.

The above applies to business entities: Sole proprietorships, partnerships, LLC/LLPs, and corporations.

It does NOT APPLY to un-reimbursed employee expenses which used to be reported on Form 2106.  Starting in 2018, those expenses and that form no longer exist.

Source: Spidell CA Taxletter; October 2018

Although not yet officially announced by the US Department of Labor, CA has announced that it has finally paid off its debt to the federal government stemming from an insolvent unemployment tax fund.  If all goes as expected, the IRS FUTA rate on the first $7,000 of CA employee wages will go from 2.7% to .6% for 2018.  That’s a reduction of $147 per employee making $7,000 or more in wages.

The US Department of Labor has until November 10, 2018 to make its formal announcement.

Reference: Yapp v. Commissioner, TC Memo, 2018=47

Husband operated a single member LLC taxed as a sole proprietorship starting in 2009.  In 2010, he incurred legal fees to redraft contracts and the operating agreement. The entire $120k was allowed by the Tax Court due to the fact that his LLC was a functioning business.

Wife formed a single member LLC taxed as a sole proprietorship in 2009.  In 2009 and 2010, she worked to reformulate health supplement recipes, but didn’t have finished products to sell until February 2011.  The Tax Court upheld the IRS denial of those development costs as they occurred prior to the start of business.  Rather, they should be capitalized and amortized over fifteen years as IRC Section 195 intangibles.

This serves as a good reminder of the treatment of pre-opening costs.

Source: Tax Cuts and Jobs Act (TCJA)

Starting in 2018, individual taxpayer casualty losses are no longer a FEDERAL deductible event UNLESS a Presidentially declared disaster.

CA: California does not conform to the TCJA.  Therefore a taxpayer suffering a casualty loss (e.g., fire, flood, mud slide, etc) may be able to claim a loss for CA income tax purposes even though not allowed on the federal return.

If you’ve suffered a casualty loss, please contact us so we can work through the numbers with you.

Ref: Vanderhal v. Comm’r, TC Summary 2018-41

The divorce decree stated that payments by husband on ex-wife’s student loan debt were to be allowed as part of alimony.  On audit, the IRS maintained that they should be a non-deductible part of the property settlement incident to the divorce.  The Tax Court found in favor of the taxpayer and allowed the payments as part of alimony noting that the divorce agreement did not specifically denote the division of debts as tax free transfers of property in this case. Therefore, the payments fit within the definition of alimony under Code Sec 71 and were deductible by Vanderhal.

Source: Senate Finance Committee ltr dated 8/16/18 to IRS

Fourteen members of the Senate Finance Committee have written to the Treasury / IRS stating that they will introduce technical corrections legislation dealing with three areas of the Tax Cuts and Jobs Act of 2017 (TCJA) that they feel the IRS has misinterpreted:

1. Qualified leasehold/restaurant/retail improvements: The letter stated that it was Congress’ intent that such property should qualify for bonus depreciation (whereas at this moment it doesn’t under current TCJA);
2. Net operating losses: Changing application of the new law to years beginning after 12/31/2017;
3. Sexual harassment/abuse law suit: Allow attorney fees as a deduction for settlements arising out of such actions.

ALL OF THE ABOVE ARE NOT YET LAW.  If/when Congress passes the technical corrections act dealing with the above subjects, the IRS will have a clear picture of Congressional intent as it applies to these areas of the TCJA.

Ref: IRS Reg-104397-18 (8/8/18)

A simplified summary of items allowed for 100% federal bonus depreciation currently through 12/31/2026:

• New personal property used for business (special rules for vehicles) with a MACRS recovery period of 20 years or less.
• Used personal property used for business UNLESS acquired from a related party (or used by the control person in another business previously)
• Computer software
• Qualified film, television or live production allowable under Code Sec 181

NOT allowed after 1/1/2018 is Qualified [leasehold] Improvement Property (QIP).

HOWEVER, according to the IRS FS-2018-9, a Section 179 expense election can be made for QIP (2018 limit of $1 million subject to phaseouts) UNLESS the improvement involves:

• the enlargement of a building
• any elevator or escalator
• the internal structural framework of the building
• roofs, HVAC, fire protection systems, alarm systems and security systems

These are very detailed regulations.  Please call for discussion if you feel that they apply to you.

Ref: Revenue Procedure 2018-33 (amplifying Rev Proc 2015-57)

When Corinthian Colleges, Inc closed, the Department of Education (ED) estimated that fifty thousand attending students had taken out loans.  American Career Institutes (ACI) was another for-profit college that closed with thousands attending.  The ED is in the process of discharging those student loans under its “Closed School” program.

The IRS has indicated that the students with these discharged loans won’t have cancellation-of-debt (COD) income on their returns.  Additionally, they won’t have to amend and repay prior education tax credits claimed or reverse education loan interest deducted.

Please call if you have further questions.

Here’s an example of the new pass-through deduction for a sole proprietor machine shop with no employees:

Service business: No (manufacturer/wholesaler)

Taxable income on his/her tax return using the new rules: $185,000

Filing status: Single

Net income of the machine shop: $215,000

Section 199A deduction: $19,350