April 3, 2018

In This Edition
The New Deal on Employee Meals (and Entertainment)
Tax Calendar
Tax Reform Highlights for Individuals and Businesses
What is "Reasonable Compensation" Anyway?

The New Deal on Employee Meals (and Entertainment)
Years and years ago, the notion of having a company cafeteria or regularly catered meals was generally feasible for only the biggest of businesses. But, more recently, employers providing meals to employees has become somewhat common for many midsize to large companies. A recent tax law change, however, may curtail the practice.  

As you're likely aware, in late December 2017 Congress passed and the President signed the Tax Cuts and Jobs Act. The law will phase in a wide variety of changes to the way businesses calculate their tax liabilities - some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall in the latter category.

Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer's business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer's premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer's premises will be completely nondeductible.

If your business regularly provides meals to employees, let us assist you in anticipating the changing tax impact.

Contact: David Howell, EA
Tax Calendar
April 17 Besides being the last day to file (or extend) your 2017 personal return and pay any tax that is due, 2018 first quarter estimated tax payments for individuals, trusts and calendar-year corporations are due. Also due are 2017 returns for trusts, calendar-year estates and C corporations, FinCEN Form 114 (Report of Foreign Bank and Financial Accounts [but an automatic extension applies to October 15]), and any final contribution you plan to make to an IRA or Education Savings Account for 2017. In addition, Simplified Employee Pension and Keogh contributions are due if your return isn't being extended.
June 15 Second quarter estimated tax payments for individuals, trusts and calendar-year corporations are due.

Tax Reform Highlights for Individuals and Businesses

Employee Achievement Awards
Arrangements that confer only the right to select and receive tangible personal property from a limited array of items pre-selected or pre-approved by the employer qualify as tangible personal property. Read more>>>

Gambling Loss Limitation is Broadened
The Tax Cuts and Jobs Act clarifies the scope of "losses from wagering transactions" as that term used with regards to the limitation on gambling losses. Read more>>>

Changes to Personal Casualty and Theft Losses
Under the Tax Cuts and Jobs Act, personal casualty losses are nondeductible unless attributable to a federally declared disaster. Read more>>>

Individual Deduction for Business Income
The Tax Cuts and Jobs Act creates a new deduction under code section 199A for Qualified Business Income. Read more>>>

Limits on the Deduction of Business Interest 
The Tax Cuts and Jobs Act places limits on the deduction of business interest for larger business entities as determined by sales volume. Read more>>>

Modification of Net Operating Loss (NOL) Deductions
The Tax Cuts and Jobs Act places limits on the use of Net Operating Losses (NOL) for most businesses. Read more>>>
Limitation on Excessive Employee Compensation 
The Tax Cuts and Jobs Act eliminates the exceptions for performance-based compensation and commissions from the definition of "applicable employee remuneration" that is subject to the $1 million deduction limit. Read more>>>

Continue following this newsletter for more highlights, or check out our blog, CPA-HQ, for more on tax reform.

What is "Reasonable Compensation" Anyway?
The issue of reasonable owners' compensation often comes up in federal tax inquiries. But it may also be an issue in shareholder disputes and divorce cases.  

For instance, minority shareholders or spouses of controlling shareholders may claim that an owner is taking an excessive salary, thereby impairing the value of the business. Alternatively, a nonowner-spouse may claim that a salary is too low, because the owner-spouse is trying to minimize the base on which alimony and child support payments will be calculated.

If you find yourself embroiled in these situations or under fire from the IRS, a financial expert can help you support - or defend against - these claims.

Factors to Consider
What's considered reasonable in shareholder disputes or divorces may vary based on state law or legal precedent. A reasonable compensation assessment generally starts by looking outside the company at external market conditions and geographic location. Then, the analysis turns to internal factors, such as the company's size, financial performance and compensation programs. Finally, the individual's contributions to the company, including his or her responsibilities, skills, reputation and experience, are factored into the analysis, along with any personal guarantees from the owner.

An owner may sometimes warrant a salary that's higher or lower than what nonowner-employees receive for similar positions. For example, the U.S. Tax Court recently upheld a combined annual salary of more than $7.3 million for two owners of a large Arizona concrete contractor. That may seem like a lot of money, but the court ruled that the company's investors still received a reasonable return on investment after owners' salaries were paid. This type of analysis is known as the independent investor test.

Compensation Resources
Another type of analysis hinges on comparable salaries paid in arm's length compensation arrangements. Reliable compensation data for a particular industry or geographic market can be found in several public and private salary surveys. A few common examples include Willis Towers Watson's executive salary surveys, the Risk Management Association's Annual Statement StudiesĀ®  and MicroBilt's Integra industry reports. An expert may also consult Economic Research Institute's quarterly salary surveys, the Conference Board's annual executive compensation reports and Dun & Bradstreet's Key Business Ratios on the Web.

Additional industry- or location-specific data can be obtained from salary surveys that break down the data by industry, market or size; industry trade associations and publications; and executive headhunters.

Outside Expertise  
Deciding what's reasonable for a business owner to receive as compensation can be subjective and sensitive. Our firm can serve as an expert or work with yours to research comparable market data and use it to come up with a defensible estimate.

Contact: Matt Eckelberg, CPA