​Last up in our three-part series covering changes under the Tax Cuts and Jobs Act are entertainment expenses. Unlike meal expenses and mileage deductions, the new law is very straightforward regarding entertainment expenses.
As of January 1, 2018, the Tax Cuts and Jobs Act completely disallows deductions for expenses incurred in relation to any activity “generally considered to be entertainment.” This decision reverses prior law allowing deductions for entertainment.
The IRS defines “entertainment” as any activity generally considered to constitute amusement or recreation, including membership dues paid to clubs organized for business, pleasure, or recreation, and payments for use of facilities in connection with any of the above.
Consequently, all forms of business entertainment including, but not limited to, golf outings, fishing, hunting, sporting events, theater and resort events, are entirely non-deductible going forward. This is true even if substantial and bona fide business discussions were associated with the activity. Such expenses remain non-deductible despite how your business may view and/or classify these expenses on your books e.g. marketing, public relations, advertising, or client development.
The law also provides that an objective test will be used to determine whether an activity is “of a type generally considered to constitute entertainment.” Ultimately, an expense will be considered an entertainment expense even if the taxpayer was not personally entertained by the event.
For example: A business owner, who despises baseball, treats a potential client to a Rockies game to discuss possible business opportunities and does not enjoy anything about the experience. This expense is still considered entertainment and non-deductible.
It is important to understand that the law pertaining to entertainment expenses is absolute. While we expect further clarification regarding the deductibility of certain meals under the new tax law, both the Treasury and the IRS have confirmed the 0% deductibility of all entertainment expenses.
As business owners, you will need to consider how the disallowance of deductions related to entertainment events, payments for use of related facilities, and club dues will alter your business expense policy. We further advise our clients to establish new general ledger accounts to properly account for and separate expenses according to their deductibility (e.g. fully deductible, 50% deductible, and non-deductible). At a minimum, if you use an expense account called “Meals & Entertainment,” we suggest that you separate this into two separate accounts. Properly identifying and recording such transactions throughout the year will help ensure efficient preparation of your taxes.  Please talk to our office if you have any questions about classifying your expense accounts.

​The IRS allows two methods of calculating the costs associated with the business use of your vehicle: the actual expense method, and the standard mileage rate method. Which method you choose will depend on a number of variables, as well as a few restrictions. It is important to note that in order to use the Standard mileage method you must use this method in the first year the vehicle is put into service. After the first year, you may elect to use either method for any subsequent tax year. However, we recommend sticking with one method for the life of the vehicle to avoid confusion and simplify bookkeeping.

What is the actual expense method?
In order to use the actual expenses method, an accurate and detailed mileage log is required. This is most critical in a vehicle that is used for both business and personal transportation. The mileage must reflect the total mileage put on the odometer in the tax year, as well as details (described below) of all miles driven. These figures are then used to determine the percentage of allowable expenses associated with business use.  
The actual expense method involves tracking all expenses related to the operation and maintenance of the vehicle, and then allocating the total expenses based on the percentage of business use. Some of the costs that can be included in total expenses are depreciation, repairs, maintenance, tires, fuel, insurance, and title and registration fees.

What is the standard mileage Rate?
The standard mileage rate method is a simplified method of calculating deductible vehicle expense. To use this method the total business miles driven is multiplied by the standard mileage rate to determine the associated expense. (10,000 miles x $0.545 = $5,450)
The standard mileage rate is up one cent in 2018 to 54.5 cents per mile. The rate is calculated each year by the IRS and incorporates expenses such as gas, repairs, depreciation and insurance, on a per mile basis. Thus, you cannot deduct individual repairs, fuel, or any other expense if you elect to use the standard mileage method. Loan interest on a vehicle is not included in the standard mileage rate so it can be deducted in addition to the amount calculated using the standard mileage rate.

Which method should I use?
If you are not prohibited from using one of the methods as discussed earlier, you will likely choose the method that provides the greatest deduction. These results can vary greatly based on any number of factors, so let’s take a look at a couple examples.
     Example. A small business owner, Fred, drove 10,000 total miles for the year. Of those miles, 5000 were directly related to the business (50%). The total vehicle expenses incurred during the year totaled $8500 (gas, insurance, repairs, etc.).
            Under the actual expense method, Fred would be allowed a deduction of $4,250. This figure is calculated by multiplying the total expenses by the percentage of business use ($8500 x 50% = $4,250).
            Under the standard mileage rate method, Fred would be allowed a deduction of $2,725. This figure is calculated by multiplying the business miles driven by the standard mileage rate (5,000 mi. x $0.545 = $2,725).
            Fred may elect to use the actual expense method as it yields a higher deduction than the standard mileage rate method.  
     Example. Another business owner, Ethel, drove 42,500 total miles for the year of which 25,000 miles were directly related to business (70%). The total vehicle expenses incurred during the year totaled $12,750 (gas, insurance, repairs, etc.).
            Under the actual expense method, Ethel would be allowed a deduction of $8,925. This figure is calculated by multiplying the total expenses by the percentage of business use ($12,750 x 70% = $8,925).
            Under the standard mileage rate method, Ethel would be allowed a deduction of $13,625. This figure is calculated by multiplying the business miles driven by the standard mileage rate (25,000 mi. x $0.545 = $13,625).
            Ethel may elect to use the standard mileage rate method as it yields a higher deduction than the actual expense method.
As shown in our examples, which method will offer the greatest benefit depends on many factors, and can have a significant impact on total expenses, net income for the year, and your tax burden. It is imperative you keep accurate detailed records of ALL miles driven and actual vehicle expenses. This is not only required by the IRS in order to substantiate your deduction, it is necessary to determine which method will benefit you the most.
The IRS requirements for tracking business mileage driven include date, destination, origin, and miles traveled. If you use the same vehicle for both business use and personal use, regardless of the percentage, you must track total miles as well as business miles by recording the odometer reading at the beginning of the year and at the end of the year.
Passenger Auto Limits
It is important to note the limits imposed by the IRS on depreciation of passenger autos. The IRS defines a passenger automobile as any four-wheeled vehicle made primarily for use on public streets, roads, and highways and rated at 6,000 pounds or less of unloaded gross vehicle weight (at 6,000 pounds or less of gross vehicle weight for trucks and vans). Heavy SUV’s, pickups, and vans are generally classified as listed property, and are subject to the same business-use substantiation rules as passenger automobiles. If you are unsure of these classifications and the subsequent tax treatment please consult your tax preparer.
 
 
There’s an app for that!
As is the case with most things these days, there are several apps that allows users to track and record each mile driven. The most popular is MileIQ and may be one of the easiest ways to meet the requirements of IRS documentation. MileIQ automatically tracks and calculates your mileage for each trip and keeps a detailed mileage log that will stand up to IRS scrutiny.
We have received great feedback from clients about MileIQ’s ease of use, and best of all it is free to try. With the free version you will be able to log 40 drives per month. However, if you drive more frequently, and require unlimited tracking, you can upgrade to the premium option for $5.99 per month or $59.99 annually. It is also available in a “Team” version which allows for multiple vehicles and drivers.