Changes to Fringe Benefits, Entertainment Expenses

BY Reidar Gullicksrud

Changes to Fringe Benefits, Entertainment Expenses

The tax reform legislation that Congress signed into law on December 22, 2017, was the largest change to the tax system in over 3 decades. The new tax code contains many provisions that will affect individual, estate, and corporate taxpayers. One of those changes, the elimination of a business-related deduction used for entertainment, amusement or recreation expenses, will make it costlier for business owners to entertain clients.

Previously, if an entertainment or meal expense was related to or associated with the active conduct of a trade or business, it was deductible up to 50 percent. Under the new tax code, these expenses are now considered the cost of doing business. In the chart below, we have highlighted the major changes.

Activity 2017 Old Rules 2018 New Rules
Qualified client meal expenses 50% deductible 50% deductible
Qualified employee meal expenses 50% deductible 50% deductible
Meals provided for employer convenience (incl water, coffee and snacks at the office for employees) 100% deductible 50% deductible (not deductible after 2025)
Client entertainment expenses

Event tickets

Qualified charitable events

50% deductible

50% deductible at face value of ticket

100% deductible

No deduction for entertainment expenses
Office holiday parties 100% deductible 100% deductible

 

The elimination of this deduction will impact business owners who are accustomed to treating clients to golf outings or providing clients with tickets to sporting events or concerts. Businesses will have to re-evaluate their entertainment expenses related to their trade or business, as these items are no longer 50 percent deductible.

In consideration of the elimination of this deduction, we recommend creating separate accounts for meals and entertainment expenses. Educating employees to separate their expenses will be vital as business meals will remain 50 percent deductible until 2025.

The IRS recently issued guidance regarding the business expense deduction for meals and entertainment expenses:

Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Furthermore, food and beverages that are provided during entertainment events will not be considered entertainment if purchased separately from the event.

The Department of the Treasury and the IRS expect to publish proposed regulations clarifying when business meal expenses are deductible and what constitutes entertainment. Until the proposed regulations are effective, taxpayers can rely on guidance in Notice 2018-76.

Entertainment expenses are notoriously targeted by auditors. Considering the law change, we anticipate these expenses to be a heightened area of concern during an audit. The professionals at Bauman Associates can help ensure you are in compliance, call us today at (715) 834-2001.

 

Sales Tax — What the Overturn of the Physical Presence Standard Means for Your Business

BY Chad Ryder

On June 21, 2018, The U.S. Supreme Court issued its highly anticipated decision in the South Dakota v. Wayfair case. The verdict, declaring that states can impose sales tax nexus without requiring a seller’s physical presence in the state, will have serious implications for all sellers, not just online retailers.

The decision overturns the Supreme Court precedent in Quill Corp. v. Dakota which required retailers to have a physical presence in a state before a state could require the seller to collect sales taxes from in-state customers.

The court’s decision sides with states like South Dakota, that were ultimately missing out on billions of dollars in income by not collecting sales tax from online retailers who lacked a physical presence in their state. According to the U.S. Government Accountability Office, state and local governments could have gained up to $13 billion in 2017 if states were given authority to require sales tax collection from all remote sellers.

Historical Perspective

In 1992, North Dakota attempted to require Quill Corporation, a retailer with no physical presence in North Dakota, to collect and pay sales tax for doing business in the state. Having done business through mail orders and by phone, Quill was able to successfully argue that they should not be required to pay taxes in a state in which they had no physical presence. The courts agreed, and thus the physical presence standard was born.

Since then, states have enacted a variety of nexus provisions to counteract the loss of revenue by out of state businesses that do not collect sales tax for the state. These types of provisions, which require remote sellers to collect tax or provide information about in-state customers, are known as remote seller nexus. This chart maps out the states that have passed legislation.

In the 1990’s, no one could have anticipated how predominate online sales and e-commerce would become. What was once a fraction of interstate sales had become a $450 billion industry. Supreme Court Justice Anthony Kennedy displayed willingness to revisit the Quill case, recognizing the decision had become dated. South Dakota identified the window of opportunity to re-challenge the 1992 Quill verdict. In a 5-4 ruling, the Supreme Court overturned Quill’s physical presence standard in Dakota v. Wayfair.

Who Will This Impact?

It is important to note that all sellers, not just online retailers, will be impacted by the overturn of the physical presence standard. This ruling will result in increased complexities for consumers, brick-and-mortar retailers, online retailers, accountants, and the technology companies that develop accounting software.

If your business sells products or services in multiple states, this ruling should warrant your attention. It will be imperative to be proactive; start by determining what the impact will be and plan accordingly.

Looking Forward

While states aren’t required to collect tax from out of state retailers, many states are expected to follow South Dakota’s path since these standards were reviewed by the Court for the Wayfair decision. Some states have passed economic nexus standards that are already in effect or will take effect within the next year.

If you would like to evaluate the impact this new law may have on your business, please contact Bauman Associates today by calling (715) 834-2001.