Tax Guru – Ker$tetter Letter

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Archive for the ‘meals’ Category

New Year Tax Changes

Posted by taxguru on December 31, 2020

It was publicized that the infamous 5,593 page Covid relief bill (Consolidated Appropriations Act, 2021) that President Trump recently signed contained a number of tax law changes.  Rather than comment on those based on speculation and rumors, I have been waiting for a detailed official analysis by one of the reputable tax publishing companies. 

I didn’t have time to read through all 5,593 pages of the law to spot the tax issues.  Heck, even our rulers in DC who vote on these monstrosities don’t ever read them, and they are paid the big bucks and treated like royalty.  Besides being a clear dereliction of duty, this enables staffers and lobbyists to sneak in all kinds of special provisions for their masters.

Once again, the first well written analysis of this new law that I have seen has been produced by the brilliant folks at The TaxBook, which has been my number one tax reference source for several years.  They were able to distill the tax related topics from those 5,593 pages into a much more reader friendly 22 page PDF document

This coming Tax Season, for 2020 returns, is certain to be confusing for many reasons. It’s not just business issues that are affected by these new changes.  There are plenty of new developments for personal matters, such as donations, medical expenses, and retirement plan withdrawals.  IRS is going to have to work like crazy to get their 2020 forms and software adjusted to be consistent with these last minute changes.

I don’t have the time or the inclination to discuss all of the tax topics covered in this summary; but I do want to cover two that I have been following and discussing for quite some time: the deductibility of business expenses paid from forgiven loans and a more generous deduction for the cost of business meals. 

Business Meals
With thousands of restaurants hit hard by the mandatory pandemic closures, it’s almost a no-brainer that one excellent way to steer more money into their accounts would be to allow businesses to deduct the full cost of business meals instead of the long-running ridiculous 50%.  I knew there had been proposals to make this change over the past several months, but there was no agreement on when the effective date of such a change would be.  Here is part of The TaxBook’s recap of this provision, from Page 5 of their newly released summary.   

The new law temporarily increases the business meal deduction to 100% for amounts
paid or incurred after December 31, 2020 and before January 1, 2023. This 100% deduction is allowed if the food or beverages are provided by a restaurant. Thus, food and beverages purchased at a venue other than a restaurant would still be subject to the 50% limitation rule. The new law does not define the term “restaurant” for purposes of this 100% deduction provision.

There is no mention if the deduction for business entertainment costs, which was eliminated in the late 2017 tax law, will be reinstated at 50% or 100% in order to help theaters and live music venues, which have been decimated by the Covid shut-downs.

 

Deducting Expenses Paid With Forgiven Loans
This is a topic that I have discussed on several occasions because even though the IRS and Treasury Secretary Mnuchin had publicly ruled that there would be no deduction for expenses that were paid from tax free income, there was always an undercurrent of discussion that Congress had not intended for that to be the case.  They had just forgotten to be more specific in their legislation, as they did their typical slap-dash job of drafting the legal language.  This new law officially specifies that there will be what many consider to be double-dipping; full deductions for all business expenses even if they were paid from PPP or EIDL loans or grants that never have to be repaid.

PPP Loans – from Page 11 of The TaxBook summary:

The new law clarifies that gross income does not include any amount that would otherwise arise from the forgiveness of a PPP loan. The new law also reverses the IRS interpretation of related expenses. The new law clarifies that no deduction shall be denied, no tax attribute shall be reduced, and no basis increase shall be denied by reason of the exclusion from gross income under the PPP loan program.

EIDL Grants – from Page 17 of The TaxBook summary:

The new law clarifies that gross income does not include forgiveness of certain loans,
emergency EIDL grants, and certain loan repayment assistance, as provided by the
CARES Act. The provision also clarifies that deductions are allowed for otherwise deductible expenses paid with the amounts not included in income, and that tax basis and other attributes will not be reduced as a result of those amounts being excluded from gross income. This provision is effective for tax years ending after March 27, 2020. A similar treatment applies for Targeted EIDL advances and Grants for Shuttered Venue Operators, effective for tax years ending after December 27, 2020.

As has been my M.O. since I began this blog, I will be posting other summaries and analyses of this new law as I come across them.


Update 1/5/21
– Another of my favorite reference services, NCPE Fellowship, has posted some nice and concise summaries of the new tax law:

Items Affecting Individual Taxes (6 six page pdf)

Items Affecting Business Taxes (6 six page pdf)

Update 1/7/21 – IRS has announced their acceptance of the new law that allows deductions for expenses paid with forgiven loan funds and declared their earlier pronouncements forbidding that as obsolete.

Eligible Paycheck Protection Program expenses now deductible

Update 1/8/21 – As with any law of this size, there will be a constant stream of rules, regulations and interpretations on how to implement its details in real life.  Yesterday, I attended the first of what will be many webinars over the next few years on this topic from my favorite CPE provider, CCH-CPELink.  It was too short at only 60 minutes, and there were changes that needed to be covered since the slides had been prepared, but it was still very informative.  Some of the useful supporting documents that were provided to attendees:  

Five page summary of the law from CCH

32 page PDF version of the slides used during the webinar

Update 2/23/21 – For today’s monthly tax update webinar on CPELink, the instructor had this updated 53 page pdf of the tax law portions of the almost 6,000 CAA bill.

Posted in meals, NewTaxLaws, PPP | Comments Off on New Year Tax Changes

New Rules For Deducting Meals & Entertainment

Posted by taxguru on April 25, 2018

As I mentioned earlier, the big “Tax Reform” law, aka the Tax Cuts and Jobs Act (TCJA), that was passed and signed into law in late December 2017, was so hastily and sloppily written that it contains several areas that are so vague and contradictory that they have everyone puzzled as to how they should be applied in real life.  One of these is the matter of deducting the costs of business meals and entertainment.  While it will most likely take several years to arrive at a firm and definitive interpretation of the law, we who do reside in the real world don’t have the luxury of waiting that long.  We need to know right now how to advise our clients. 

To that end, the fine folks at TaxCoach have assembled a handy chart comparing the rules for deducting various types of meals and entertainment expenses under the old 2017 tax law versus the new 2018 law.  They shared it with us during today’s weekly online strategy meeting.  Theirs was a PowerPoint file, which I have converted to its basic graphic and text components for this blog post.  The following chart and explanation are the creations of TaxCoach

Click on the chart below for a more legible full size version.

TC-M E(17v18)

Here are some changes you probably won’t like. Like a kitchen food processor, the new law slices, dices, and purees some of the most popular deductions for meal & entertainment expenses. The chart summarizes deductions under the old and new law.

For starters, there’s real speculation that the law may have unintentionally eliminated deductions for the classic “three martini” lunch entirely. Under the old rules, meals with prospects, clients, and referral sources were deductible under the same rules governing entertainment expenses. The new law repeals the umbrella deduction for entertainment expenses , which would appear to include business meals. However, the Senate explanation to their version of the bill, which ultimately made it into law, states that “Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).”

So, which is it? Are traditional business meals still deductible or not? Well, we just don’t know. So until we get some guidance, prudence suggests you should continue to document those expenses, including the business purpose of the meal, to protect your deductions if we get clarification on the question. Better to have your ducks in a row and not need them than to need them and not have them!

Transportation expenses to and from business meals are still deductible, as they’re governed by a different section of the code that remains good today.

Unfortunately, there’s no doubt at all that the old “entertainment” deduction is gone. Under the old rules, you could deduct 50% of the cost of any entertainment expenses that took place directly before or after a a substantial, bona fide discussion directly related to the active conduct of your business. Deductions included the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes, and tips. The new law repeals that deduction, regardless of how much business you discuss at the event or what business entity you operate. Now, none of those expenses are deductible – not even transportation to and from the venue.

The new law also tightens rules for deducting the cost of providing food and beverages to your employees under the “convenience of the employer” or “de minimis” fringe benefit rules. The new law cuts those deductions to just 50%, and eliminates them entirely after 2025.

Posted in meals, NewTaxLaws | Comments Off on New Rules For Deducting Meals & Entertainment

Deducting 100% of meals?

Posted by taxguru on April 3, 2008

Q:

Subject: Meals 100% Deductible for Strategic Planning Meeting?

Kerry,

I am a sole practitioner and I came across this article on CNN Money.

Linda Rey (pictured at right, with sister Laura and father Frank) is co-owner of Rey Insurance, a broker based in Sleepy Hollow, N.Y. She and her partners (who also happen to be family members) hold a monthly dinner at a restaurant, which they treat as an offsite strategic planning meeting (100% deductible) rather than a business meal with a client (50%). Even with coffee and Dunkin’ Donuts for the Friday morning meeting, she always takes the full 100% deduction, while many companies wrongly file this under meals and take half. “I pay careful attention,” says Rey. “Otherwise you end up giving a lot of money away.”

I have never heard of deducting meals at 100% for an off-site strategic planning meeting. I researched this issue and could not find support their comment. I can’t see where this type of meal falls within the 100% allowed M&E categories. Everything I find says 50% disallowed for this type of expense. Are you familiar with deducting meals at 100% for an off-site strategic planning meeting (and morning donuts), or is this just another case of the media giving false information which makes us explain why it is wrong to our clients.

Thanks,

A:

I’ve heard of people trying this; but I can’t agree with the logic or stand behind this idea.

As we know, there is a lot of the honor system in the tax game in regard to how we post expenses. Calling something a “Meeting Expense” effectively hides it from the 50% limit that business meals have.

I browsed the online QuickFinder and the printed and WebCD TaxBooks for any mention of 100% deduction for meals at strategic planning meetings and came up empty.

For example, QuickFinder online had this for a similar situation:

Home Meetings
Direct sellers who hold business meetings in their homes can deduct expenses for the meetings as entertainment expenses and expenses related to the business use of their home only when they meet certain tests.

The expenses of entertaining business associates in the direct seller’s home are deductible as entertainment expenses if they meet the rules discussed under Meals and Entertainment. The expenses of maintaining the direct seller’s home as a place of business are deductible if he or she meet the tests discussed under Business Use of the Home.

Example: Barbara and Bill hold bi-weekly meetings in their home for the direct sellers who work under them. They discuss selling techniques, solve business problems and listen to presentations by company representatives. Because the meetings are for business, Barbara and Bill can deduct 50% of the cost of the food and beverages they provide. See Deduction Limit. They keep a copy of their grocery receipts for these refreshments, and record the date, time and business nature of each meeting. Be­cause the meetings are held in their living room rather than in a special area set aside only for business, they cannot deduct any of their home expenses for the meetings.

I’ve had cases where meals were one part of a business related meeting that had a single admission price. I have posted those to 100% deductible Meetings expense. However, where the meeting is at a restaurant and the full amount being paid out is for food, I have to believe that the deduction would be limited to the standard 50%.

It would be interesting to hear what other tax practitioners have to say about this.

I feel that those people bragging about deducting 100% of their meals in that article had better prepare themselves for an IRS audit which will also delve into other creative deductions they may be claiming.

Thanks for writing and good luck with the rest of this Tax Season.

Kerry Kerstetter

Posted in comix, meals | Comments Off on Deducting 100% of meals?