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Member of Russell Bedford International, a global network of independent professional service firms.
Investing in a franchise can be a wonderful opportunity, but it can also involve a completely unfamiliar set of rules when it comes to your taxes. Whether you are considering becoming a franchisee or have recently become involved, it’s important that you seek the right advisor to help ensure you understand your tax obligations and prepare accordingly. Here are just a few of the things that you need to keep in mind:
How you organize your franchise is going to be one of your earliest decisions, and one of your most important. From a tax perspective, your tax advisor can advise on different corporate/unincorporated structures and the tax implications of each. You should also be sure to engage an experienced franchise attorney to review legal documents related to the franchise, lease agreements, and/or bank loans. The attorney can also advise on asset protection strategies based on the organizational structure you choose.
Even though you take direction from the franchise on marketing materials, training methods, employee rules and suppliers, and many other decisions, you are still in charge of the business in ways that the IRS defines as being self-employed. You make your own schedule and establish your own community and business relationships, so the government puts you in the same category as a sole proprietor. That means you need to report your earnings on a Schedule C, just like single-member LLCs and sole proprietors do, and you need to pay the additional 15.3% tax that self-employed people are assessed.
The rules surrounding taxes on self-employed individuals are complicated, and we’ve expanded on this topic in a prior blog.
One of the advantages of being a franchisee is that you can be either an active or a passive participant. Making the decision about whether you are hands-on or simply purchasing the business and handing off the day-to-day operational responsibilities to a partner has important tax ramifications. Establishing whether your earnings are passive or active will be one of the first tasks on your tax professional’s list. By answering questions like the ones below, your advisor will be able to understand what you do and to what extent.
Franchisees that have materially participated in the business in five of the previous ten years can be determined to be active participants, regardless of their answers to the other test questions they will be asked.
If your answer is more than 500 hours, the IRS can consider you a material participant rather than a passive one.
If you worked at least 100 hours on the business and no less than anybody else, then you can be considered an active participant.
These are just a few of the IRS’s material participation tests that are used to make this important determination that impacts the way that passive losses are handled. If you are identified as passively involved, then any losses you realize as a franchisee can only be offset by other passive income. The losses can be carried forward if you don’t have enough income to offset them, but you will never be able to take the deduction of passive losses against wages, active business earnings, or other ordinary income.
It’s important to note that the passive loss rules apply whether you decide to incorporate your franchise, operate as a partnership, or as a self-employed individual.
Different types of businesses are eligible for specialized tax incentives, and if you are new to franchising you may not be fully aware of them. Here are a few that your advisor may be able to help identify for you:
As you can see, the opportunities that come with being a franchisee come with a host of tax regulations that may be unfamiliar and confusing. To set yourself up for success and avoid both confusion and the potential for penalties, contact us at Cray Kaiser so we can help you navigate and plan for this new world.
A federal tax credit for the purchase and installation costs of a residential solar system has been extended through 2023. The solar tax credit for 2021 and 2022 is 26% of the cost of the solar installation but drops to 22% for 2023, the final year of the credit (unless extended again by Congress).
When you see TV ads for home solar power, you may get the impression that Uncle Sam is going to pick up 26% of the cost, and you only have to come up with the other 74%. But that is not the whole picture. It’s true that the federal government has a 26% tax credit for the cost of a qualified solar installation (some states also have solar credits or other incentives). However, the federal credit is non-refundable and can only be used to offset your current tax liability. Any excess carries over to future years, as long as the credit still applies in future years. Currently, the credit is allowed through 2023. This means that you may not get all the credit in the first year, as you might have been led to believe.
Consider this example: In 2021, your solar installation costs $25,000. That would qualify you for a solar tax credit of $6,500. But suppose the income tax on your tax return is only $4,000. The credit would reduce your tax liability to zero, and the other $2,500 ($6,500 – $4,000) of the credit is carried over to 2022’s tax return, where the credit will be limited to that year’s tax amount. If your tax is again less than the amount of the credit, the excess credit carries to the following year, and so on, until the credit is used up or expires.
Compare the cost of the system (and the interest you will be paying, if you are financing it) to conventional electricity costs. How many years will it take to recover your cost? Do you plan to live in your home beyond that time? Is a solar system really worth the cost? Electricity costs can vary significantly according to locale.
Even if not financially beneficial, there are situations in which the cost may not be the deciding factor. Some areas experience frequent power outages, you may simply want to go green, or you may want to go off the grid where electric service is not reliable.
If you plan to move forward with a solar installation, here are some of the tax issues you need to be aware of.
Only the following solar power systems are eligible for the credit:
The credit may be claimed on the tax return of the year during which the installation is completed. For example, if you purchase and pay for a system completed in 2022, the credit will be 26% of the cost. But if the project isn’t completed until 2023, the credit will only be 22%. This becomes an even a bigger issue for systems installed during 2023 that aren’t completed before 2024, when the credit rate will be zero. So, if you plan to purchase a solar system in 2023, the purchase should be made early enough in the year to ensure the installation is completed before 2024.
There is a lot to consider before making the final decision to install a solar system. Is it worth it? Is it the right financial move for you? Please call Cray Kaiser at (630) 953-4900 before signing any contract to make sure a solar system is appropriate for you.
Please note that this blog is based on tax laws effective in March 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
As if this past year has not been stressful enough, the Office of the Inspector General for the Department of Labor has just announced that at least $36 billion, and possibly as much as $63 billion, has been lost to unemployment fraud. In many cases the improper payments are a result of fraudsters who spent the earliest months of the pandemic filing unemployment claims using stolen personal data. What this means is that millions of unsuspecting Americans are about to receive federal forms reporting unemployment benefits that they never received. Not only does this leave them potentially vulnerable to identify theft issues, but in the short term it also means that the federal government may be expecting them to pay income taxes for money somebody else received.
If your identity was stolen, you’ll receive a form known as the 1099-G from the federal government, which treats certain unemployment benefits as taxable income.
There is a solution if you are sent a 1099-G for unemployment benefits that you did not receive. Though it represents a bit of work, the IRS has indicated that it is aware of the problem and is working hard to help. They say that recipients of an incorrect 1099-G need to contact their state’s unemployment agency and ask them to send a corrected, revised form that will reflect the correct amount received. Though this may be difficult if you live in a state where the unemployment agency’s response rate has been slowed by the pandemic, some states have established hotlines dedicated to addressing this specific issue and have increased the number of support staff available to help. Much of this increase in attention is the result of guidance that the IRS issued to states at the end of 2020, notifying them of the identity fraud issue.
If you aren’t able to get a revised form by the tax filing deadline, the IRS indicates that you should simply file a return that accurately reflects the amount that you received. Be sure to discuss with your tax advisor about how they can best document your issue.
It’s completely natural to feel a bit panicked if you receive one of these forms erroneously, but the IRS has said that there is no need to file an Identity Theft Affidavit that is specific to the IRS. The agency says that those affidavits are specifically for taxpayers whose e-filed tax return is rejected as a result of a duplication of the use of their Social Security number for a tax filing. Still, if you are concerned and want to take additional steps to protect your identity then you can ask for an Identity Protection PIN when you file your income taxes. Having this unique number will help keep anybody else from being able to use your Social Security number to file a fraudulent tax return.
Beyond that, you can take the following steps to protect yourself against the impact of unemployment fraud and identity theft:
If you have been a victim of unemployment fraud and received a 1099-G, contact Cray Kaiser immediately. We’re here to help.
Please note that this blog is based on tax laws effective in March 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Most taxpayers think they have to itemize their deductions to claim them on their tax return. However, that is not entirely true! There are certain deductions that can be claimed while still using the standard deduction. Here is a list of those tax deductions you can take without itemizing:
For 2020, non-itemizers can deduct up to $300 of cash contributions above-the-line. The $300 limits apply both to single and married taxpayers. Donations to donor-advised funds and private foundations aren’t eligible for the above-the-line deduction (2020 and 2021). The term “above-the-line” is a shorthand way of saying that the deduction reduces gross income when figuring adjusted gross income (AGI).
For 2021, non-itemizers filing a joint return can deduct up to $600 of cash contributions, while taxpayers using the other filing statuses continue to be limited to $300. Unlike the 2020 version of this deduction, which is an above-the-line deduction, the 2021 deduction is claimed after the AGI is determined.
A qualified educator can annually deduct above-the-line to a maximum of $250 of qualified unreimbursed classroom expenses. These expenses include:
Note that a qualified educator is generally considered a kindergarten through grade 12 teacher, instructor, counselor, principal or aide and works in a school at least 900 hours during the school year.
Contributions to Health Savings Accounts (HSA) are also an above-the-line deduction. HSAs can only be established by eligible individuals who are covered by high-deductible health plans and generally not covered under any other health plan. There are statutory limits to the amounts that can be contributed to an HSA. Subject to statutory limits, eligible individuals may make tax deductible contributions to HSAs, and employers as well as other persons (e.g., family members) may contribute on behalf of eligible individuals. Since an employer’s contributions to an employee’s HSA are excludable from the employee’s income, the employee can’t also claim a deduction for those contributions.
Amounts in HSAs accumulate tax-free, and distributions are tax-free if used to pay for or reimburse qualified medical expenses. Some individuals use HSAs as supplemental retirement plans when they are maxed out on other available tax beneficial retirement plans.
A taxpayer can deduct up to $2,500 above-the-line of interest paid by the taxpayer on a student loan on behalf of the taxpayer, spouse or dependents. The deduction is phased out for higher-income taxpayers.
This above-the-line deduction is allowed for qualified tuition and related expenses only to the extent the expenses are in connection with enrollment at an institution of higher education during that tax year. The expenses are limited to $2,000 or $4,000, depending upon the taxpayer’s AGI. The same expenses can’t be used for this deduction and the American Opportunity Credit or the Lifetime Learning Credit, and 2020 is the last year for this deduction.
A self-employed taxpayer can deduct one-half of the self-employment tax computed on Schedule SE for the year.
A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) may be able to deduct 100% of the amount paid during the tax year for medical insurance on behalf of themselves, their spouse and dependents as an above-the-line expense. The deduction is limited to the amount of the individual’s net SE income. Additionally, the individual, spouse or dependent cannot participate in an employer subsidized health plan.
For divorce or separation instruments entered into before 2019 that haven’t been modified to include the tax law change effective for post-2018 instruments, an individual may be able to claim an above-the-line deduction for alimony payments made during the year, if certain requirements are met. Effective for divorce or separation instruments entered into after December 31, 2018, alimony payments aren’t deductible by the payer and aren’t taxable to the recipient.
As part of the 2018 tax reform, certain businesses are allowed a deduction that is generally equal to 20% of their qualified business income (QBI). This deduction is most commonly known as a pass-through income deduction because it applies where the business income passes through to the individual’s, partner’s, or stockholder’s 1040 income tax return. While not an above-the-line deduction because it doesn’t reduce gross income, this pass-through deduction, like the standard and itemized deductions, is subtracted from AGI to figure taxable income.
Contributions to traditional IRAs, self-employed SEPs, SIMPLEs, and other qualified retirement plans are above-the-line deductions. However, the deduction for some of these contributions for an employee won’t appear as a line item on the tax return because the tax benefit has already been applied by reducing their taxable wages. The most common example of this treatment is 401(k) plan contributions in which the employee designates a percentage of their wage that is contributed to the plan and their gross wages are reduced by the contribution amount, leaving the balance of the wages as taxable.
If you have questions about tax deductions you can take without itemizing or how any of these deductions might apply to your tax return, please contact Cray Kaiser today. We’re here to help!
Please note that this blog is based on tax laws effective in March 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
The Internal Revenue Service announced on March 17 that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. The IRS will be providing formal guidance in the coming days. Here’s what the extended tax deadline for individuals may mean for you:
The postponement applies to individual taxpayers filing their 2020 income tax return. Penalties, interest and additions to tax will begin to accrue on any remaining unpaid balances as of May 17, 2021.
Individuals with estimated tax requirements do not have an extension on the first quarter 2021 estimated tax payment date. These payments are still due on April 15. We expect that individuals who usually file an extension with a payment that is specifically meant to cover the first quarter estimated tax payment will need to send two payments – the first quarterly payment on April 15, and the extension payment on May 15. If the IRS specifies otherwise, we will let you know.
The announcement did not indicate that calendar year estate/trust income tax filings received an extension of time to file. Estates/trusts appear to have the same April 15 due date.
The announcement did not indicate that calendar year C corporation tax filings received an extension of time to file. C corporations appear to have the same April 15 due date.
As the guidance seems geared specifically to individual 2020 tax returns, we do not expect that other tax filings will be extended from April 15, 2021, to May 17, 2021.
As the IRS extended the individual tax deadline, states have begun to react.
Notably, on March 18, Illinois announced that the 2020 individual income tax deadline was similarly extended from April 15, 2021, to May 17, 2021. The extension only applies to the 2020 individual income tax return; it does not apply to individual tax estimates, corporations, or estate/trust tax returns, which remain due on April 15, 2021.
Earlier this year, the IRS announced relief for victims of the February winter storms in Texas, Oklahoma and Louisiana. These states have until June 15, 2021, to file various individual and business tax returns and make tax payments. The extension to May 17 does not affect the June 15 deadline.
In short, the extended tax deadline for individuals seems to have limited application, especially for those individuals with estimated tax requirements. At Cray Kaiser, we continue to push ahead with tax season accordingly. If you have questions on how the extension may affect you, please contact us today at 630-953-4900.
Please note that this blog is based on tax laws effective in March 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Many taxpayers rent out their first or second homes without considering tax consequences. Even if you rent out your property using rental agents or online rental services that match property owners with prospective renters (i.e. Airbnb, VRBO, HomeAway), it is still your responsibility to properly report the rental income and expenses on your tax return. You should be aware of some special tax rules for renting your home that probably apply to you.
When a property is rented for fewer than 15 days during the tax year, the rental income is not reportable, and the expenses associated with that rental are not deductible. Interest and property taxes are not prorated, and the full amounts of the qualified mortgage interest and property taxes are reported as itemized deductions (as usual) on the taxpayer’s Schedule A.
Rentals are generally passive activities, which means that losses from these activities are generally only deductible up to the amount of gains from other passive activities. However, an activity is not treated as a rental if either of these statements applies:
If the activity is not treated as a rental, then it will be treated as a trade or business, and the income and expenses, including prorated mortgage interest and real property taxes, will be reported on Schedule C.
If the personal services provided are similar to those that generally are provided in connection with long-term rentals of high-grade commercial or residential real property (such as public area cleaning and trash collection), and if the rental also includes maid and linen services that cost less than 10% of the rental fee, then the personal services are neither significant nor extraordinary for the purposes of the 30-day rule.
The tax rules for renting your home can be complicated. Please call Cray Kaiser at 630-953-4900 to determine how they apply to your particular circumstances and what actions you can take to minimize tax liability and tax maximize benefits from your rental activities.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Are you asking yourself: is my inheritance taxable? This is a frequently misunderstood taxation issue, and the answer can be complicated. When someone passes away, all of their assets (their estate) will be subject to estate taxation, and whatever is left after paying the estate tax passes to the decedent’s beneficiaries.
Sound bleak? Don’t worry, very few decedents’ estates ever pay any estate tax, primarily because the tax code exempts a liberal amount of the estate’s value from taxation; thus, only very large estates are subject to estate tax. In fact, with the passage of the Tax Cuts & Jobs Act, the estate tax exemption has been increased to $11,580,000* for 2020 and will be inflation-adjusted in future years. Generally, this means that estates valued at $11,580,000* or less will not pay any federal estate taxes, and those in excess of the exemption amount only pay estate tax on the excess amount. Keep in mind that there are less than 10,000 deaths each year for which the decedent’s estate exceeds the exemption amount, so for most estates, there will be no estate tax and the beneficiaries will generally inherit the entire estate.
*Please Note: As with anything tax-related, the exemption is not always a fixed amount. It must be reduced by prior gifts in excess of the annual gift exemption, and it can be increased for a surviving spouse by the decedent’s unused exemption amount.
For decedents that are either residents of Illinois at the time of their passing or nonresidents that have property in Illinois, the estate tax exemption is $4,000,000. So, it is possible that an estate may have a state estate tax, but not a federal estate tax.
Of course, once a beneficiary (also referred to as an heir) receives the inherited asset, any income generated by that property — be it interest from cash, rent from real estate, dividends from stocks, etc. — will be taxable to the beneficiary, just as if the property had always belonged to the beneficiary.
Because the value of an estate is based upon the fair market value (FMV) of the assets owned by the decedent on the date of their death (or in some cases, an alternative valuation date six months after the decedent’s date of death), the beneficiaries will generally receive the inherited assets with a basis equal to the same FMV determined for the estate. What this means to a beneficiary is that if they sell an inherited asset, they will measure their gain or loss from the inherited basis (i.e. the FMV at date of death).
Example #1: Joe inherits shares of XYZ Corporation from his father. Because XYZ Corporation is a publicly traded stock, the FMV can be determined by what it is trading for on the stock market on the date of his father’s passing. Thus, if the inherited basis was $40 per share and the shares are later sold for $50 a share, Joe will have a taxable gain of $10 per share. In addition, the gain will be a long-term capital gain, since all inherited assets are treated as being held long-term by the beneficiary. On the flip side, if the shares are sold for $35 a share, Joe would have a tax loss of $5 per share.
Example #2: Joe inherits his father’s home. Like other inherited property, Joe’s basis is the FMV of the home on the date of his father’s death. However, unlike the stock, the FMV of which could be determined from the trading value, the home needs to be appraised to determine its FMV. It is highly recommended that a certified appraiser performs the appraisal and that it be done reasonably close in time to the decedent’s date of death. This is frequently overlooked and can cause problems if the IRS challenges the amount used for the basis.
This FMV valuation of inherited assets is frequently referred to as a step up in basis, which is really a misnomer because the FMV can, under some circumstances, also be a step down in basis.
Not all inherited assets received by the beneficiary fall under the FMV regime. If the decedent held assets that included deferred untaxed income, those assets will be treated differently by the beneficiary. Examples of those include inherited:
Traditional IRA Accounts: These are taxable to the beneficiaries, but special rules generally allow a spouse beneficiary to spread the income over the surviving spouse’s lifetime, while the distribution period is capped at 10 years for most non-spouse beneficiaries if the decedent died after 2019. Previously, the rules allowed most non-spouse beneficiaries of decedents who died prior to 2020 to use a lifetime distribution method.
Roth IRAs: Qualified distributions are not taxable to the beneficiary.
Compensation: Amounts received after the decedent’s death as compensation for their personal services are taxable to the beneficiary.
Pension Payments: These are generally taxable to the beneficiary.
The estate tax rules could change dramatically according to the tax plan of President-Elect Joe Biden. His plan includes provisions eliminating the step up in basis. As soon as we have more information, we will update this blog.
In the meantime, if you have questions related to the tax ramifications of an inheritance, please contact Cray Kaiser at 630-953-4900.
Please note that this blog is based on tax laws effective in December 2020, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
In the past, the IRS has assigned verification numbers to victims of identity theft to file their tax returns, if requested by the victimized individual. The number is referred to as an identity protection PIN (IP PIN). The IP PIN is a six-digit code known only to the taxpayer and the IRS. It helps prevent identity thieves from filing fraudulent tax returns using a taxpayer’s personally identifiable information.
The IP PIN serves as the key to an individual’s tax account. Electronically filed returns that do not contain the correct IP PIN will be rejected, and paper returns will go through additional scrutiny for fraud. Effective now, anyone can request an IP PIN, it is no longer limited to victims of identity theft. Given the uptick in unemployment tax fraud, where thousands of social security numbers were compromised, now is the time to consider obtaining the IP PIN.
If you want an IP PIN for 2021, visit IRS.gov/IPPIN and use the “Get an IP PIN” tool. This online process will require that you verify your identity using the Secure Access authentication process if you do not already have an IRS account. Visit IRS.gov/SecureAccess for a list of the information you need to be successful. After you have authenticated your identity, a 2021 IP PIN will immediately be revealed.
All taxpayers are encouraged to first use the online IP PIN tool to obtain their IP PIN.
I was interested in trying out the process of obtaining an IP PIN personally. Unfortunately, the process of verifying my identity wasn’t as smooth as expected. It turns out that a large part of the verification process is through your cell phone. And what happens when the cell phone plan is not in your name but in your spouse’s name? Well, Plan B! The next step was for the IRS to mail a code to my home address. Upon receipt of the code, I could verify my identity and register my cell phone. Once in the system, less than a minute passed before I had my IP PIN. While in this particular case I faced an additional obstacle, it is still worth having the added security around filing my taxes and I would still recommend going through the process.
Taxpayers who cannot verify their identities online have other options. Certain taxpayers may complete Form 15227, Application for an Identity Protection Personal Identification Number, and mail or fax it to the IRS. An IRS customer service representative will contact the taxpayer and verify their identity by phone. Taxpayers should have their prior year’s tax return on hand for the verification process. Taxpayers who verify their identities through this process will have an IP PIN mailed to them the following tax year. This is for security reasons. Once in the program, the IP PIN will be mailed to these taxpayers each year.
We believe the identity protection PIN program is an important part of protecting your tax identity. If you have questions, please contact Cray Kaiser.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
COVID-19 has affected nearly every aspect of our lives since the pandemic began in March 2020. It has affected the finances of most Americans, creating waves of economic stress. The pandemic will have lasting tax implications that many people may have not considered. For some, it can mean simply reporting income or expenses differently. For others, it may mean having to pay additional income taxes that had not been planned for. Regardless of your specific situation, this might be the year that you should hire a tax professional to help address tax complications due to COVID-19.
As individuals are losing their jobs or had to decrease work because of the pandemic, they are turning to other sources of income such as unemployment benefits and/or dipping into retirement savings. For those who are tapping into these funds for the first time, there are likely questions about taxation, specifically whether taxes are due as a result of these additional income sources.
Are unemployment benefits taxable?
This may be surprising to you, but your unemployment benefits will be fully taxable at the federal level. In general, unemployment benefits might be taxed by the state as well, depending on where you live. For example, Alabama and California do not impose any taxes on unemployment benefits, but the benefits are fully taxable as regular income in Illinois. If you are the recipient of Illinois unemployment benefits, taxes likely have been withheld from the payments, but these may or may not cover your individual tax burden.
Are retirement benefit withdrawals taxable?
If you take out retirement benefits early (before age 59 ½), there is generally a 10% penalty imposed on any taxable distributions. However, tax changes because of COVID-19 allowed individuals to withdraw from retirement without paying the 10% penalty, as long as the withdrawal took place during 2020. You must also meet certain requirements that indicate you have a stressful financial situation because of COVID-19.
Even if you meet the qualifications, avoiding the 10% penalty is not the only tax that you must pay. Additionally, the amounts withdrawn are often taxed as income, depending on how your retirement plan was established. Many people may not recognize this additional tax cost until the tax return is filed, so they have not been planning for it. If you hire a tax professional, they will be able to guide you through the tax implications of collecting unemployment and/or withdrawing from your retirement plan and planning for the tax ramifications accordingly.
The various stimulus programs have created opportunity as well as uncertainty. The stimulus payments, in particular, generated a fair amount of misinformation as to who qualified and who didn’t qualify. As the final stimulus payment/credit will in certain cases be based on your 2020 tax filing, did you know there may be an opportunity to receive even more of a stimulus payment? Your tax professional can advise of planning that may generate an additional tax credit on your 2020 tax filing.
The best way to ensure that you are addressing tax issues appropriately with the IRS, or any other taxing authority, is to hire a tax professional. A tax professional will be able to determine if there is a valid tax issue and how to best resolve the matter.
The tax professional can also advocate with taxing authorities on your behalf. For example, there have been a number of incorrect tax notices issued, and issues with payments posting correctly. Tax professionals are aware of these challenges and can work directly with the revenue agents to ensure that not only is your account resolved, but that there are no implications to your credit score from invalid collection efforts.
Having a tax professional on your side to help you deal with tax preparation, tax planning, tax notices and negotiations with the IRS can be invaluable. Do not work through this process alone, especially if COVID-19 has created some unique issues for you in 2020. Cray Kaiser is here to help you in this process, so please do not hesitate to contact us to get started on your taxes.
Please note that this blog is based on tax laws effective in January 2021, and may not contain later amendments. Please contact Cray Kaiser for most recent information.
Some information found in this blog has been updated. Please see the newest version here.
The original regulations regarding the Meals and Entertainment deductions were part of the 2018 Tax Cuts and Jobs Act (TCJA). Companies and self-employed individuals have been subject to these rules since then; however, there was ambiguity regarding the rules over the past few years. Fortunately, the IRS recently published the final regulations regarding the changes to the Meals and Entertainment deductions under the TCJA.
If you recall, prior to the TCJA, both meals and entertainment expenses were at least 50% deductible with a few other expenses being fully deductible. Under the TCJA regulations, there were some categories of the meals that were still eligible for 50% deduction just as under the old law. Meals with clients, meals during business travel, and meals at seminars and conference all continue to be 50% deductible. However, there were significant changes to some categories of meals and entertainment expenses:
1) Entertainment expenses, such as sporting events and club memberships that were 50% deductible under the old law are not deductible under the TCJA. Note that meals purchased separately at these events for the client while discussing business would still be eligible for a 50% deduction.
2) Meals, water, coffee, snacks, etc. at the office for benefit of employees are now eligible for only a 50% deduction. Under the prior law, these expenses were eligible for the full deduction.
We suggest that your accounting records segregate entertainment, meals, and office snacks in separate accounts to identify the proper deductibility of these expenses. Please note that picnics and holiday parties held primarily for the benefit of your employees will continue to be fully deductible. We suggest that this amount be recorded in a separate account from the entertainment, meals, and office snacks accounts.
Click here to view a chart with common meals and entertainment categories, and the deductibility of each category for tax purposes. Note that effective for tax years 2021 and 2022, the recently-passed COVIDTRA allows for a 100% tax deduction for expenses for food or beverages provided by a restaurant.
What hasn’t changed? Meals with clients and others for business purposes still require substantiation (the amount, time and place, business purpose, and business relationship).
Cray Kaiser is here to help if you have further questions about the meals and entertainment deductions. Please contact us today at 630-953-4900.
Please note that this blog is based on laws effective in January 2021 and may not contain later amendments. Please contact Cray Kaiser for most recent information.
