The Tax Cuts and Jobs Act (TCJA) means several changes in the depreciation and expensing of vehicles used in a taxpayer’s trade or business.

Vehicles not subject to these limitations are detailed below, as are other types of property that are subject to general provisions also explained below. Under the TCJA, §179 expensing has increased to $1 million and the phase-out threshold has increased to $2.5 million for qualified assets placed in service during tax years beginning on or after January 1, 2018. Previously, taxpayers were limited to $500,000 in §179 expensing and the phase-out threshold was $2 million.

Prior to the TCJA, taxpayers were permitted a deduction of 50% the cost of certain types of new tangible property the year it was placed in service. One hundred percent bonus deprecation is now allowed for qualified property acquired and placed in service after September 27, 2017, but before January 1, 2023. If property was acquired prior to September 28, 2017, but not placed in service until after September 27, 2017, then prior year rules will continue to apply. After 2022, the rate of bonus depreciation decreases over the next four (4) years:

• 80% for property placed in service in 2023
• 60% for property placed in service in 2024
• 40% for property placed in service in 2025
• 20% for property placed in service in 2026

With regard to passenger automobiles, §280F(a) provides dollar limitations on depreciation and §179 expense deductions that a taxpayer may take for “luxury automobiles.” Any vehicle of 6,000 pounds of gross vehicle weight or less is considered a “luxury automobile.” Vehicles under this weight limitation are subject to the 280F limitations, which limit the available depreciation and §179 deductions.

Limitations on “Luxury Automobiles”

“Luxury automobiles” that are placed into service after December 31, 2017, will be able to take advantage of the increased dollar limitations on deprecation and expensing under the TCJA. For 2018, the amount of depreciation and expensing deductions for a passenger car or light duty truck or van shall not exceed:

• $10,000 for the first taxable year in the recovery period,
• $16,000 for the second taxable year in the recovery period,
• $9,600 for the third taxable year in the recovery period, and
• $5,760 for each succeeding taxable year in the recovery period.

These numbers will be adjusted for inflation after the 2018 tax year. The TCJA retained the $8,000 limit for additional first-year depreciation for passenger automobiles. Therefore, in 2018, the maximum amount a taxpayer can deduct in the first year is $18,000.

§179 Limitations on SUV’s

§280F limits §179 deductions to $11,160 for vehicles up to 6,000 lbs. in 2017 and $18,000 in 2018 and beyond. Those SUVs with a gross vehicle weight above 6,000 lbs. (but not above 14,000 lbs.), are limited to a $25,000 §179 deduction. Vehicles that are above 6,000 lbs. but not more than 14,000 lbs. are not subject to the §179 $25,000 limit if any of the following exceptions apply:

• The vehicle is designed to have a seating capacity of more than nine persons behind the driver’s seat,
• The vehicle is equipped with a cargo area of at least 6 feet in length that is considered an open area or is designed for use as an open area but is enclosed by a cap and is not readily accessible directly from the passenger compartment or,
• The vehicle has an integral enclosure, fully enclosing the driver compartment and load-carrying device, but does not have seating behind the driver’s seat, and has no body section protruding more than 30 inches ahead of the leading edge of the windshield.

SUVs purchased after September 27, 2017 remain subject to the $25,000 §179 limit, however, both new and used vehicles are eligible for 100% bonus depreciation if they are above 6,000 lbs. For a taxpayer’s first taxable year ending after Sept. 27, 2017, that taxpayer may elect to apply a 50% allowance instead of the 100% allowance. To make this election, the taxpayer must attach a statement to their timely filed return indicating that they are electing to claim a 50% special depreciation allowance for all qualified property. Once made, the election cannot be revoked without consent of the IRS. Taxpayers may also elect out of bonus entirely for any class of property by filing an election on a timely filed return. Once filed, this election too cannot be revoked without consent of the IRS.

Please note that all of these deductions will be further limited by the business use percentage of the vehicle in question. Furthermore, if business use of the vehicle is below 50% use of the accelerated method is not permitted.

Comparison
The following is a comparison of the tax treatment of vehicles prior to and under the TCJA. Both of these comparisons assume $8,000 of bonus depreciation.

For automobiles subject to the 280F limitations that were placed in service prior to September 28, 2017, bonus depreciation is not available. Furthermore, bonus depreciation is not available on used vehicles placed in service prior to September 28, 2017. The following limitations will apply to vehicles placed in service in 2017 for which bonus depreciation does not apply:

• First Tax Year: $3,160
• Second Tax Year: $5,100
• Third Tax Year: $3,050
• Each Succeeding Year: $1,875

Prior to the Tax Cuts and Jobs Act (TCJA), taxpayers were permitted to deduct interest on home equity debt. That was true specifically for those debts which were secured by the taxpayer’s home and were not an “acquisition indebtedness” (such as those incurred acquiring, constructing or improving a home).

Through Code §163(h)(3)(F), the TCJA eliminated the deduction for interest on home equity debt for tax years beginning after December 31, 2017 and before January 1, 2026. This was applicable regardless of when the home equity debt had occurred.

Through Informational Release IR 2018-32, the IRS clarifies that, although restricted by the TCJA, taxpayers can still deduct interest on many home equity loans, home equity lines of credit, or second mortgages. The IRS states that TCJA suspends the deduction for interest paid on home equity loans and lines of credit when they are used for something other than the purchase of, building of or substantial improvement of that taxpayers home that secures the loan.

This Informational Release also clarifies the new dollar limitations on total qualified residence loans for those taxpayers considering taking out a mortgage. The TCJA imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. For tax years after December 31, 2017, taxpayers may only deduct interest on $750,000 of qualified residence loans. These are down from the prior limits of $1 million, or $500,000 for a married taxpayer filing a separate return. The limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home, as well as a second home.

In order to qualify for this deduction, the home equity loan must be considered “acquisition indebtedness,” which is essential debt secured by a home and used to acquire, construct, or substantially improve the home. If the home equity line qualifies as acquisition indebtedness, the interest should be deductible, subject to the new principal balance limitations ($750,000 for debts incurred after December 15, 2017). If the principal balance of the mortgage and the equity line combined is in excess of this limitation, the interest deduction will be limited.

The following examples illustrate these updates.

Example 1: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home and both loans are secured and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. However, if the taxpayer used the home equity loan proceeds for personal expenses, such as paying off student loan and/or credit card debt, then the interest on the home equity loan would not be deductible.

Example 2: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home and the loan is secured. In February 2018, the taxpayer takes out a $250,000 loan to purchase a vacation home and the loan is secured. Because the total amount of both mortgages does not exceed $750,000, all of the interest paid on both mortgages is deductible. However, if the taxpayer took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan would not be deductible.

Example 3: In January 2018, a taxpayer takes out a $500,000 mortgage to purchase a main home and the loan is secured. In February 2018, the taxpayer takes out a $500,000 loan to purchase a vacation home and the loan is secured. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible.

For questions on this or any other provision of the Tax Cuts and Jobs Act please contact a member of the HBK Tax Advisory Group.

If you moved for work-related reasons in 2017, you might be able to deduct some of the costs on your 2017 return — even if you don’t itemize deductions. (Or, if your employer reimbursed you for moving expenses, that reimbursement might be excludable from your income.) The bad news is that, if you move in 2018, the costs likely won’t be deductible, and any employer reimbursements will probably be included in your taxable income.

Suspension for 2018–2025

The Tax Cuts and Jobs Act (TCJA), signed into law this past December, suspends the moving expense deduction for the same period as when lower individual income tax rates generally apply: 2018 through 2025. For this period it also suspends the exclusion from income of qualified employer reimbursements of moving expenses.

The TCJA does provide an exception to both suspensions for active-duty members of the Armed Forces (and their spouses and dependents) who move because of a military order that calls for a permanent change of station.

Tests for 2017

If you moved in 2017 and would like to claim a deduction on your 2017 return, the first requirement is that the move be work-related. You don’t have to be an employee; the self-employed can also be eligible for the moving expense deduction.

The second is a distance test. The new main job location must be at least 50 miles farther from your former home than your former main job location was from that home. So a work-related move from city to suburb or from town to neighboring town probably won’t qualify, even if not moving would have increased your commute significantly.

Finally, there’s a time test. You must work full time at the new job location for at least 39 weeks during the first year. If you’re self-employed, you must meet that test plus work full time for at least 78 weeks during the first 24 months at the new job location. (Certain limited exceptions apply.)

Deductible expenses

The moving expense deduction is an “above-the-line” deduction, which means it’s subtracted from your gross income to determine your adjusted gross income. It’s not an itemized deduction, so you don’t have to itemize to benefit.

Generally, you can deduct:

• Transportation and lodging expenses for yourself and household members while moving,
• The cost of packing and transporting your household goods and other personal property,
• The expense of storing and insuring these items while in transit, and
• Costs related to connecting or disconnecting utilities.

But don’t expect to deduct everything. Meal costs during move-related travel aren’t deductible nor is any part of the purchase price of a new home or expenses incurred selling your old one. And, if your employer later reimburses you for any of the moving costs you’ve deducted, you may have to include the reimbursement as income on your tax return.

Please contact us if you have questions about whether you can deduct moving expenses on your 2017 return or regarding what other tax breaks will and will not be available for 2018 under the TCJA.

UPDATE: PLEASE NOTE THAT THE IRS ISSUED CHANGES TO THIS RULING. PLEASE SEE THE NEW ARTICLE DATED OCTOBER 2, 2020 FOR DETAILS ON THE UPDATES.

The 2017 Tax Cuts and Jobs Act (TCJA) dramatically altered the Internal Revenue Code as it relates to the deductibility of entertainment expenses and the meals associated with that entertainment. Entertaining is an activity that many businesses conduct to engage new clients and customers. These changes will have an immediate effect in 2018 on how businesses deduct these expenses and whether they want to continue to incur the costs associated with entertainment.

Meals

Meal expenses are generally deductible if they are ordinary, necessary, and reasonable expenses that are directly related to or associated with the active conduct of an entity’s trade or business and are properly substantiated. For meals with a business prospect or client, the employer or an employee must be present for the duration of the meal in order to qualify as a deductible expense. No deduction is permitted for any personal, living, or family expense. Under the new Tax Cuts and Jobs Act (TCJA), the 50 percent deduction for these meals is still mostly intact.

One major change is in regards to meals that are provided by an employer to an employee on the employer’s premises for the employer’s convenience (previously a deductible de minimus fringe benefit). These meals are now limited to 50 percent deductibility under the TCJA. Prior to the TCJA, these meals were 100 percent deductible to the employer. Examples include providing meals to employees during an emergency, or when an employee is on call and would otherwise be unable to secure a proper meal. Similarly, meals that are provided at an employer-operated eating facility, such as a company cafeteria or café, are also subject to the 50 percent deductibility limitation.

Entertainment

All expenses incurred for entertainment, amusement or recreational expenses, including meals related thereto are not deductible after 2017. This is a major change as these expenses were previously 50 percent deductible to the extent that had business purpose. Entertainment includes any activity of a type that is generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs and sporting events, and on hunting, fishing, vacation, and similar trips.

Nondeductible entertainment expenses also include membership fees and dues for any club organized for business, pleasure, recreation, or other social purposes, and any facility fees connected with any of the listed items.

The good news is that the following pretty much survived the entertainment restrictions. Activities with continued deductibility include:

• Entertainment, amusement, and recreation expenses you treat as compensation to employees and that are included as wages for income tax withholding purposes;
• Expenses for recreational, social, or similar activities (including facilities therefor) primarily for the benefit of employees (other than employees who are highly compensated employees). This would include company picnics or holiday parties;
• Expenses that are directly related to business meetings of employees, stockholders, agents, or directors (here, the law limits expenses for food and beverages to 50 percent);
• Expenses directly related and necessary to attendance at a business meeting or convention such as those held by business leagues, chambers of commerce, real estate boards, and boards of trade (here, the law also limits expenses for food and beverages to 50 percent);
• Expenses for goods, services, and facilities you or your business makes available to the general public;
• Expenses for entertainment goods, services, and facilities that you sell to customers; and
• Expenses paid on behalf of non-employees that are includible in the gross income of a recipient of the entertainment, amusement, or recreation as compensation for services rendered or as a prize or award.

The Take Away

The TCJA changes how entertainment expenses will have to be tracked within a business to determine proper deduction treatment. As mentioned in the above sections, this legislation will most likely change how businesses entertain customers, prospects and employees. Attached is a chart, which summarizes the deduction treatment in 2018 and beyond for many of the most common expenses business may encounter.