Tax Cuts and Jobs Act - Tips, Tricks, and Traps

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The Tax Cuts and Jobs Act (TCJA) made significant changes to the ways taxpayers had become accustomed to preparing their taxes, and created some surprising and unexpected nuances. Here is a list of some issues we encountered with our clients this past tax season.

 

Entertainment Expenses

Prior to TCJA's changes, 50% of the cost of both meals and entertainment were disallowed on business tax returns. TCJA retained the 50% rule for meals, but the deduction for entertainment expenses was entirely repealed (LMC TCJA Alert #5). Businesses should adjust their chart of accounts to record entertainment expenses separately from meals.

 

Entertainment means more than golf outings, sporting events and concerts - deductions are no longer allowed for club membership dues, even groups organized for business purposes. But the IRS has clarified that meals furnished to clients and prospects are not entertainment. 50% of such meals are still deductible if a business owner or an employee is present and the meal is not lavish or extravagant.

 

Alternative Minimum Tax (AMT)

AMT is a parallel tax system which taxpayers must calculate and pay if it results in a higher tax. Before TCJA, AMT was the de facto tax for most taxpayers earning between $200,000 and $1 million, especially in high-tax states. Five million taxpayers paid AMT in 2017. But TCJA increased the AMT exemption amount - from $84,500 to $109,400 for joint filers (LMC TCJA Alert #15). Moreover, the income threshold where that exemption phases out increased over six times (to $1 million on joint returns).

 

Because of the changes, only 250,000 taxpayers are expected to pay AMT for 2018. The limited categories of taxpayers still paying AMT include those who exercise incentive stock options and construction contractors with long-term income.

 

Itemized Deductions

TCJA repealed the entire "miscellaneous" category of deductions, including expenses like unreimbursed employee expenses, investment expenses, and professional dues. It also capped the deduction of state and local tax expense at $10,000. But many taxpayers who were in the AMT did not realize that they had not received any benefit from these deductions anyway, so these changes do not affect them.

 

Taxpayers may believe they need not track expenses that were repealed by TCJA. However, they should still be provided to your tax preparer because many states have not fully conformed to TCJA and the expenses may remain deductible on your state return.

 

Hobby Losses

Before TCJA, taxpayers reporting income earned in hobbies - activities in which they made some money but were not in it for profit - could deduct losses (to the extent of income) as miscellaneous itemized deductions. With that category now repealed, hobbyists are taxed on their gross income with no reductions at all. Nor can they claim TCJA's 20% passthrough deduction, because the hobby is not considered a trade or business.

 

Your LM Cohen professional can help explain what these significant tax changes mean to your situation. All our prior Tax Cuts and Jobs Act Alerts are available on the Updates page of our website.

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