26 | RKL 2018 Year-End Tax Planning Guide RKL 2018 Year-End Tax Planning Guide | 27 BUSINESS TAX DEDUCTION CHANGES Many business tax deductions have changed or been repealed under tax reform and the law also created a new, significant deduction opportunity for pass-through business owners. For specific discussions around deductions used in the past, contact your RKL tax advisor. Limits on Interest Expense Deduction For businesses with more than $25 million in revenue, tax reform caps the amount of deductible interest expense at the sum of 30 percent of adjusted taxable income, business interest income and floor plan financing interest expense for years 2018 and forward. Interest expense is defined as taxable interest paid or accrued on indebtedness allocable to a trade or business. As a result, investments in tax-free municipal bonds do not increase a taxpayer’s interest expense deduction capacity. The deduction limitation is applied after other interest disallowance, deferral, capitalization or other limitation provisions. Any business interest not allowed as a deduction for any taxable year as a result of the limitation is treated as business interest paid or accrued in the succeeding taxable year. Any disallowed interest generally may be carried forward for an indefinite period. The Partnership or S Corporation deduction limitation applies at the entity level. Disallowed interest of the entity is allocated to each partner or shareholder as excess business interest. For leveraged businesses of this size, this could increase the amount of taxable income and effectively increases the cost of debt capital. It creates additional complexity for reporting in tiered pass-through entity structures. The provision does not include a grandfather rule for existing debt obligations or disallowances and the limitation reduces the advantages of debt financing or debt assumption in mergers and acquisitions. There are a number of complexities with the new deduction limitation and additional guidance still forthcoming from regulators. Contact your RKL advisor to discuss within the confines of your individual business circumstances. DPAD Repealed For tax years beginning after December 31, 2017, the Domestic Production Activity Deduction (DPAD) no longer applies. Congress originally intended to help U.S. companies compete against international tax systems with this targeted corporate rate reduction. Since an overall lower corporate tax rate was enacted with the passage of tax reform, DPAD is no longer needed to achieve the desired result. Patents & Self-Created Property The Tax Cuts and Jobs Act amended the definition of capital asset to exclude patents, inventions, models or designs (whether or not patented) and secret formulas or processes. Gain or loss arising from the sale, exchange or other disposition of these assets will no longer be treated as the sale of capital assets and will be taxed at ordinary rates. This treatment is effective for dispositions after December 31, 2017. Gain or loss on the disposition of other self-created intangibles such as personal goodwill, client lists and customer contracts are still eligible for capital gain treatment. Like-Kind Exchanges Like-kind exchanges rules under Code §1031 now only apply to exchanges of real property. Real property must still be held for productive use in a trade or business or for investment to be eligible for like-kind exchange treatment. This applies to exchanges completed after December 31, 2017. Keep in mind that real property located in the U.S. is not considered like-kind to real property located outside the U.S. Partnerships that made a valid election to be excluded from subchapter K continue to be treated as an interest in the assets of the partnership and not an interest in the partnership for Code §1031 purposes. Entertainment & Meals Effective for amounts paid or incurred after December 31, 2017, tax reform disallows deductions for: • An activity considered entertainment, amusement, and recreation, even when directly related to the conduct of a taxpayer’s trade or business; • Membership dues for any club organized for business, pleasure, recreation, or other social purposes; or • A facility or portion of a facility used in connection with any of the above. Tax reform still allows a 50 percent deduction for food and beverage expenses associated with a trade or business. For tax years after 2017 and before 2026, this 50 percent deduction limitation will also apply to certain meals provided by an employer that were previously 100 percent deductible, including de minimis meals, on-premises meals and meals provided for the convenience of the employer. For tax years after 2025, these meals will all be 100 percent nondeductible. Fringe Benefit Limitations Deductions are no longer allowed for expenses associated with providing qualified transportation fringe benefits and transportation for commuting between the employee’s residence and place of business (unless for the purpose of ensuring the safety of an employee). This includes van pools, subway or transit cards, qualified parking expenses and qualified bicycle commuting reimbursements. Employers now have to choose to either include these amounts in employee taxable income and take a 100 percent tax deduction or exclude the amounts from income and take a lesser deduction.