When it comes to tax planning, CPAs and mothers have something in common: they both advise against waiting until the last minute to get things done. But as any mom can tell you, a lot of people don’t listen: As of April 27, more than a week after the due date — and before extensions — for most individual tax returns, the IRS had only received about 139.9 million of the 155 million returns expected to be filed. That’s a lot of procrastinators.
CPAs like it when clients start their tax planning early because it gives them and their advisers more time to consider options. But even now, as the final quarter of the year ticks away for individuals and calendar-year businesses, there’s still time for some last-minute moves, according to experts.
“Consider selling some of your ‘loser stocks’ before year-end,” said Martin Abo, managing member and founder of the accounting firm Abo & Co. LLC. “Such capital losses will offset capital gains you have plus an additional $3,000 of other earnings or income.”
Business owners should note the IRS recently issued some guidance on the business expense deduction for meals and entertainment, following changes in the 2017 Tax Cuts and Jobs Act.
“The TCJA eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation,” he said. “The IRS just clarified some ambiguity by telling us if food and beverages are provided during entertainment events, they will not be considered entertainment if purchased separately from the event. You can continue to deduct 50 percent of the cost of business meals if you, the taxpayer — or an employee of the taxpayer — are present and the food or beverages are not considered lavish or extravagant.”
Abo added that to be deductible, the business meal must also “be directly before or after a substantial business discussion, or while actively participating in a meeting, discussion or other business activity to seek income or some other specific business benefit.”
Keeping good records and segregating general ledger accounts for entertainment expenses and the 50 percent deductible business meal expenses is also a good move, according to Abo. “Better to do that now and eliminate surprises at tax time,” he said.
Abo went on to offer additional advice about covering employee expenses. “Effective January 1, 2018, an employee no longer can deduct any of his or her unreimbursed employee business expenses,” he noted. But many companies cover their employees’ business expenses by reimbursing them for their actual expenses or paying a travel or mileage allowance.
“Such arrangements are subject to strict tax rules concerning what qualifies as a legitimate reimbursement arrangement and what is treated — at least for tax purposes — as additional compensation to the employee,” he added.
According to the tax rules, there is a key distinction between a true expense reimbursement and “disguised compensation” that is generally treated as taxable income to the employee. If the employer’s payments are made in accordance with what the IRS calls an “accountable plan,” which generally requires employees to substantiate all reimbursed expenses and return any advances in excess of expenses incurred, “the business can deduct the payments made under the plan for federal income tax purposes, although meal reimbursements are still subject to the 50 percent disallowance,” he said.
Consequently, the payments under an accountable plan are basically treated the same as tax-free employee fringe benefits, and “this is beneficial for employers and employees alike. Everybody’s happy,” Abo said.
Businesses that maintain their books on a cash basis — recording revenue and expense transactions when cash is received or payments are made — may want to consider deferring their revenue to the next year while prepaying some expenses this year, noted Simon Filip, a tax partner at KRS CPAs.
“But be cautious about prepaying suppliers, since the cost if inventory items are generally not deductible until the product is sold,” he warned. “On the other hand, expenses like utility bills or subscriptions to business-related subscriptions can usually be deducted when they’re paid.”