The Tax Cuts and Jobs Act reduced tax rates but also changed the deductibility of meals, entertainment, and business interest in ways transportation companies needed to track separately and plan around.
Meals and Entertainment
Entertainment expenses incurred after Dec. 31, 2017, generally became nondeductible. Under prior law, entertainment directly related to the business was often 50% deductible.
Business meals provided for the employer's convenience became 50% deductible and were scheduled to become fully nondeductible after 2025. They had previously been fully deductible.
Common treatments described in the article were:
- Client business meals where business is conducted, the taxpayer is present, and the cost is not lavish: 50% deductible
- Holiday parties, company outings, and picnics: 100% deductible
- Meals during business travel or conferences: 50% deductible
- Employer-convenience and overtime meals: 50% deductible, scheduled to become nondeductible after 2025
- Sporting events, golf, and similar entertainment: nondeductible
The law was unclear about meals provided in connection with entertainment. The authors believed a separately stated meal related to operating the trade or business should qualify for a 50% deduction, but IRS guidance was still needed.
Because meals and entertainment previously shared a general-ledger account and similar treatment, the article recommends separating them so the deductible portion can be calculated accurately.
Interest Expense
Before the TCJA, business interest was generally fully deductible. For tax years beginning after Dec. 31, 2017, the deduction could be limited.
A major exception applied to taxpayers with gross receipts not exceeding $25 million.
For other businesses, deductible interest was generally limited to the sum of:
- Business interest income
- 30% of adjusted taxable income
- Floor-plan financing interest, primarily relevant to automobile dealers
Adjusted taxable income started with taxable income and excluded nonbusiness items, business interest income and expense, net operating losses, the qualified business income deduction, and depreciation, amortization, and depletion.
For tax years beginning after 2021, depreciation, amortization, and depletion would be included when calculating adjusted taxable income, reducing the base and potentially restricting the deduction further. That change was especially important for capital-intensive carriers.
Disallowed interest could be carried forward indefinitely.
Entity-Level and Owner-Level Treatment
The limitation was calculated entity by entity, but the eventual deduction depended on the type of entity.
For an S corporation, disallowed interest remained at the entity level until the company generated enough income to release it.
For a partnership, excess interest was allocated to partners and carried at the partner level until the same partnership allocated enough future taxable income.
The interest rules were complex and potentially significant for equipment-heavy transportation companies, making them an important part of 2019 and later tax planning.