Under the old tax law, a C or S corporation (but not a sole proprietorship, single-member LLC or any entity taxed as a partnership) could receive contributions to capital from any governmental entity or civic group on a tax-free basis. The price of immediate tax-free treatment was a reduction to the cost basis of the corporation’s assets purchased with those contributed funds, lowering depreciation expense in the future. Common examples of such tax-free nonshareholder contributions to capital were tax incremental funds (TIF), a municipality’s sale of land to the taxpayer at a discount, incentive grants, brownfields grants and historic preservation grants.
However, the receipt of such contributions after December 22, 2017, by any type of entity, including a C or S corporation, will now be taxable income. There is one significant exception: These types of nonshareholder contributions will still be tax-free to C and S corporations regardless of when received, so long as they are made pursuant to a “master development plan that was approved by a governmental entity prior to December 22, 2017.” Of course, we are waiting for guidance on what will qualify as a master development plan for this purpose.
Also, note that this change applies only to grants. Other state and local incentives such as credits, exemptions and abatements can still be received on a tax-free basis.
A taxpayer’s tax deductions for meals and entertainment expenses has also changed under the TCJA. Certain meal expenses (including de minimis free lunches, beverages, snacks, etc. brought in for staff) that were previously 100% deductible are only 50% deductible, and certain entertainment expenses that were 50% deductible are now not deductible at all. Click on this link to receive a handy Business Meal, Entertainment and Travel Deductibility Checklist so you can track your 2019 expenditures correctly.