The Tax Cuts and Jobs Act—Business Deductions


Under the Tax Cuts and Jobs Act (TCJA), business deductions have changed quite a bit. These significant changes, positive or not, will require research and action on the taxpayer’s part. Every business (or the business’s advisor) needs to sort through the various changes and fully understand the potential outcome.

Section 179 Expensing Expanded
The TCJA increases the maximum amount a taxpayer may expense under section 179 to $1 million—up from $500,000. The phase-out threshold is increased to $2.5 million. The property eligible was also expanded to include the following improvements to nonresidential real property after the date the property was placed into service: heating, ventilation and air conditioning, roofs, fire protection, and security alarms.

Bonus Depreciation—100% Expensing
Qualifying property acquired after September 27, 2017 now is eligible for 100% expensing. The previous limit was 50%. The big news is the TCJA changed the requirements, and now used property is eligible. So, a used delivery truck qualifies, provided it was not acquired from a related party. Limits still apply to the amount of first-year depreciation for vehicles weighing fewer than 6,000 pounds. The first-year bonus depreciation phases down after December 31, 2022.

Interest Expense—Limitation on Deduction (Maybe)
We’ll start by saying businesses with average annual gross receipts (three year average) of less than $25 million are exempt from this limitation. If it does apply, interest deduction is limited to 30% of adjusted taxable income.  Any excess can be carried forward indefinitely.

  • Adjusted taxable income used to determine limitation is before any deduction for depreciation, amortization, or depletion. So, adjusted taxable income should be higher than net income.
  • Those who use a floor plan to finance inventory—boats, cars, and machinery are exempt.
  • For pass-through entities, the limitation is determined at the entity level—partnership level, not at the partner level.

Entertainment Expense is Almost Gone
Beginning in 2018, no deduction is allowed for entertaining clients or referral sources.  One exception is the entertainment for employees via the annual holiday party or picnic.

Confused? Take a look at the chart below.

2017 (Old Rules)

Beginning 2018  (New Rules)

Office Picnic or Party

100% deductible

100% deductible

Entertaining Clients—

Tickets to Events, Golf, etc.

50% deductible

No deduction

Event tickets—50% deductible for face value of ticket;
amount above face value is nondeductible

Tickets to qualified charitable events—100% deductible

Business Meals
e.g. Employee Travel Meals

50% deductible

50% deductible

Meals Provided for
of Employer

100% deductible, provided they are excludible from
employees’ gross income as de minimis fringe benefits;
otherwise, 50% deductible

50% deductible
(nondeductible after 2025)

 These changes require close attention on the accounting side. We recommend setting up three different expense accounts to correctly categorize your business expenses: Entertainment—nondeductible, Employee business meals and those for convenience of the employer—50% deductible, Employee recreational/social—100% deductible.