The debate is over when it comes to deductions of business meal expenses. Changes caused by the new tax law passed in December 2017 ruled out all deductions for any kind of entertainment expense. Commentators debated whether business meals would continue to be deductible. Some, like me, thought the change would do just that. Some reasoned that the changes were made in just the right places so that deductions for meals was still allowed. Others just believed the IRS would cut taxpayers some slack.
The second two groups of commentators turned out to be right. On Tuesday, October 3, 2018, the IRS issued a notice indicating how they would treat deductions of business meals. Basically, the 50% deduction for meals is still in place. There are some exceptions. Because deductions for entertainment expenses are out, you can take your client to an event and buy food, etc. there. Tickets to the event are not deductible, but 50% of the costs of the food, etc. is. On the other hand, if you take your client to an event where the event, food and beverages are all included in a lump sum price, you can’t deduct any of it. There is an exception to that rule: if the price of the food and drinks is broken out separately. In that case, you can deduct 50% of the cost of the food and drinks.
Notice 2018-76; 2018-42 IRB; IR 2018-195 sets out the general guidance and provides three examples, the essence of which is set out above.
Bunching and QCDs
Bunching
For years (even decades), financial advisors have advocated “bunching” of deductions (and, conversely, sometimes, delaying recognition of income). Bunching means trying to pack into one tax year all deductions normally paid over two tax years. For example, in Texas, property taxes are due when the statements come out in October but there are no late penalties unless you delay payment until after January 31 of the following year. Imagine if you paid your 2018 property taxes in January 2019 and then paid your 2019 property taxes when you get your 2019 property tax statement in October. That way, you would be paying two years of property taxes in the same calendar year. That might get enough to make itemization better than the standard deduction.
However, bunching for property taxes is limited. Now we have a limitation on state and local tax deductions of $10,000 per calendar year. If bunching drives you over $10,000, you can’t deduct the excess, whether you itemize or not.
QCDs
What about charitable deductions? The only limits there are a percentage of your adjusted gross income. Most taxpayers never get near those limits. Consider making your donations for 2018 this fall, and make what would be your 2019 donations also in 2018 – perhaps to a donor advised fund and then “advise” the fund managers in 2019 when and how much to distribute to your favorite charities. That way the charities get the same benefits at the same times you would have expected them to get them. The net result is you have two years of charitable deductions all in 2018.
Here is a potentially powerful technique that should get some attention, especially this of year. For taxpayers who are age 70-1/2 or older, who make charitable contributions but not enough to itemize, consider having your charitable contributions made directly from your IRA. That’s a “qualified charitable deduction.” That removes the money from taxable income and gets the charity the money you would have donated to them anyway. Just getting that money out of your income reduces your taxes, even if you don’t itemize. It may have the added benefit of dropping you into a lower tax bracket, saving you even more money.
For more info, go this IRS webpage: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras-distributions-withdrawals
and scroll down a little more than halfway down the page. At that point, you should see the heading, “Qualified charitable deductions.”
Forbes has an article here: https://www.forbes.com/sites/davidmarotta/2016/04/28/qualified-charitable-distributions-qcds-from-iras/#54c349b441f1
Kiplinger has one here: https://www.kiplinger.com/article/retirement/T054-C000-S004-ira-qcd-rules-qualified-charitable-distributions.html