Updates

Deduct 100 Percent of Your Business Meals under New Rules

Since 1986, lawmakers have limited business meal deductions: first to 80 percent, and then to 50 percent (unless an exception applies).

But on December 27, 2020, in an effort to help the restaurant industry due to the COVID-19 pandemic, lawmakers enacted a new, temporary 100 percent business meal deduction for calendar years 2021 and 2022.

To qualify for the 100 percent deduction, you need a restaurant to provide you with the food or beverages.

The law requires only that the restaurant provide the food and beverages. You don’t have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal that’s delivered by Uber Eats or Grubhub.

Your deductible business meals must be tax code Section 162 ordinary and necessary business expenses, and they must not be subject to disallowance under tax code Section 274.

You must be present at the business meal, and you must provide the business meal to a person with whom you could reasonably expect to engage or deal with in the active conduct of your business, such as a customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.

Remember, to qualify for the 100 percent deduction, you need a restaurant. The IRS recently provided definitions and examples of what is and is not a restaurant.

A restaurant is “a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises.” It is not any of the following:

  • Grocery stores
  • Specialty food stores
  • Beer, wine, or liquor stores
  • Drug stores
  • Convenience stores
  • Newsstands
  • Vending machines or kiosks

In general, the 50 percent limitation applies to business meals from the sources listed above.

The restaurant creates the 100 percent deduction.

To help you get ready, check the table below for what you can do in 2021 and 2022 as the law stands now:

Description (Deductible for Tax Years 2021-2022)100% Deductible50% DeductibleZero Deductible
Restaurant meals with clients and prospectsX  
Entertainment such as baseball and football games with clients and prospects  X
Employee meals for convenience of employer, served by in-house cafeteria X 
Employee meals for required business meeting, purchased from a restaurantX  
Meal served at chamber of commerce meeting held in a hotel meeting roomX  
Meal consumed in a fancy restaurant while in overnight business travel statusX  
Meals cooked by you in your hotel room kitchen while traveling away from home overnight X 
Year-end party for employees and spousesX  
Golf outing for employees and spousesX  
Year-end party for customers classified as entertainment  X
Meals made on premises for general public at marketing presentationX  
Team-building recreational event for all employeesX  
Golf, theater, or football game with your best customer  X
Meal with a prospective customer at the country club following your non-deductible round of golfX  

Starting a New Business? Get Up to $100,000 in Tax-Free Money

You likely already know that the employee retention credit (ERC) is a good deal—if you qualify.

Now, thanks to the recently enacted American Rescue Plan Act of 2021 (ARPA), you can qualify for up to $100,000 of ERC in the third and fourth quarters of 2021 if you

  • begin the business after February 15, 2020 (you could start today),
  • have average annual gross receipts of $1 million or less, and
  • do not meet either of the ERC tests—the suspended operations test or the gross receipts test—in place before ARPA was passed.

When you meet the three requirements above, you qualify as a recovery start-up business and, as such, can claim an ERC of up to $50,000 in both the third and fourth quarters of 2021.

It works like this: your recovery start-up business ERC is equal to 70 percent of the qualified wages paid to each employee (up to $10,000 per employee per quarter), with an overall maximum credit of $50,000 per quarter.

The big deal with the two quarters of 2021 is that your business has to be new, but it does not have to suffer from COVID-19 stresses. In fact, it can’t qualify for the recovery start-up business special deal if it otherwise qualifies under the suspended operations test or the gross receipts test.

Tax Considerations When a Loved One Passes Away (Part 3)

Previously, we sent you emails discussing the tax issues that arise when a financially comfortable loved one has passed away.

In this email, we dive into some of the non-tax issues you will have to deal with as the executor of the estate.

Getting Extra Death Certificates

For various reasons, a death certificate may be needed to prove that the decedent has indeed passed away. You may need originals (not copies) for some purposes.

Get at least five originals from the applicable source. Get more if the decedent had lots going on—such as real estate owned in several jurisdictions. If in doubt, get more originals than you think will be needed. In fact, get a lot more.  

Updating a Married Couple’s Revocable Trust

If the decedent was married, a revocable trust (aka family trust, living trust, or grantor trust) may have been set up to hold the couple’s most important assets and thereby avoid probate for those assets.

Both spouses are usually named as co-trustees. If so, the trust may have to be amended to eliminate the decedent as a co-trustee and add a new co-trustee (usually an adult child) to help the surviving spouse manage the trust’s assets.

If the surviving spouse passes away before the desired changes are made, the trust—with all its uncorrected faults—becomes irrevocable and set in stone. That would not be good!  

Selling a High-End Home

If the decedent was widowed at the time of death, the heirs will probably want to sell the home. In most areas, there are distinct home-selling seasons.

The real estate agent will encourage you to get the place ready for sale during that season so it can be sold for top dollar. You may be presented with a ready-for-sale deadline that’s much sooner than you would prefer—more time pressure.       

If the decedent was married, the surviving spouse may want to downsize, move closer to relatives, or move to a low-tax state.

Changing the Title to the Home

You may have to change the title to the home before it can be sold.

For example, this can be the case if the home was owned by a revocable trust to avoid probate. If the decedent was single, the trust is now an irrevocable trust, because the person who set it up has died.

Considering Whether the Surviving Spouse Can Live Comfortably without Selling the Marital Abode

If the answer is yes, the survivor may want to stay put. But if the survivor is quite elderly, that may just postpone all the inevitable home sale and relocation issues.

Deciding Whether the Surviving Spouse Can Handle the Finances

Some married couples, and many elderly couples, delegate virtually all financial matters to one spouse. The surviving spouse may not be that person.

Checking the Surviving Spouse’s Life Insurance Policies

The now-deceased spouse may have been the designated policy beneficiary of the surviving spouse’s life insurance policies. This is more likely than not, and it’s not a good thing.

Getting Investment and Retirement Accounts in Order

First, you must find out whether such accounts exist, how big they are, and what investments they hold. Some investments may need to be liquidated to cover the estate’s and/or surviving spouse’s expenses.

Investigating Safe-Deposit Boxes

Get into the safe-deposit box and deal with what you find. There may be more than one box.

  • Valuable stamps and rare coins could be in a box.
  • Property titles are likely to be in a box.
  • There could be U.S. Savings Bonds worth thousands in a box. Who knows?

Shutting Things Down

This step might include shutting down utilities, garbage pickup, yard care, pool service, security monitoring, phone and cable services, and credit cards.

Secrets to IRS Penalty Forgiveness Using Reasonable Cause

The IRS can waive penalties it assessed against you or your business if there was “reasonable cause” for your actions.

The IRS permits reasonable cause penalty relief for penalties arising in three broad categories:

  1. Filing of returns
  2. Payment of tax
  3. Accuracy of information

Contrary to what you might think, the term “reasonable cause” is a term of art at the IRS. This seemingly simple phrase has a precise and detailed definition as it relates to penalty abatement.

Here are three instances where you might qualify for reasonable cause relief:

  1. Your or an immediate family member’s death or serious illness, or your unavoidable absence
  2. Inability to obtain necessary records to comply with your tax obligation
  3. Destruction or disruption caused by fire, casualty, natural disaster, or other disturbance

Here are five instances where you likely do not qualify for reasonable cause penalty relief:

  1. You made a mistake.
  2. You forgot.
  3. You relied on another party to comply on your behalf.
  4. You don’t have the money.
  5. You are ignorant of the tax law.

SEP IRA vs Solo 401(k): Which Should You Choose?

How do you multiply your net worth?

Let the government help.

Here’s how: with both the SEP IRA and the solo 401(k) retirement plans, your investment in your tax-favored retirement

  • creates tax deductions for the money you invest in the plan,
  • grows tax-deferred inside the plan, and
  • suffers taxes only when you take the money from the plan.

Example. You invest $1,000 a month in your retirement. You are in the 40 percent tax bracket (combined federal and state), and you earn 10 percent on your investments. At the end of 30 years, you have $1.58 million in after-tax spendable cash, which comes from (in round numbers):

  • $1.2 million in after-tax cash from the retirement plan ($2 million gross less 40 percent in taxes—we’re taking the entire amount out of the plan in this example)
  • $380,000 in the side fund (created by investing the $400 of monthly tax savings—$1,000 deduction x 40 percent)

If you had no government help on the taxes and invested $1,000 a month in an investment that earned 10 percent (6 percent after taxes), you would have a little more than $950,000.

Winner. The retirement plan wins by $630,000—after taxes ($1.58 million vs. $950,000).

Okay, that’s the big picture. It tells you that tax-advantaged investing multiplies profits. So, do it.

Tax Considerations When a Loved One Passes Away (Part 2)

If you become an executor of your loved one’s estate, you may have some important tax decisions to make. Here are some quick thoughts.

The decedent’s medical expenses provide you with planning opportunities to

  • deduct as itemized deductions (subject to the 7.5 percent floor) not only the medical expenses incurred during the taxable year of death, but also those unpaid at the date of death but paid within one year of death; or
  • deduct in full (no floor) the medical expenses paid after the date of death against the federal estate tax.

You, as the executor, may need to file

  • the decedent’s final Form 1040,
  • the estate’s Form 1041 income tax return, and
  • the estate’s Form 706.

You won’t need to file Form 1041 when all the decedent’s income-producing assets bypass probate and go straight to the surviving spouse or other heirs by contract or by operation of law—assets such as

  • real property that is owned by joint tenants with right of survivorship,
  • qualified retirement plan accounts and IRAs that have designated account beneficiaries, and
  • life insurance death benefits that are paid directly to designated policy beneficiaries.

If the estate is valued at $11.58 million or less and the decedent did not make any sizable gifts before death, you don’t have to file Form 706. But even if you don’t have to file Form 706, you may want to file it anyway to preserve the portability election.

New PPP Forgiveness Rules for Past, Current, and New PPP Money

Good news.

The new Paycheck Protection Program (PPP) law enacted with the stimulus package adds dollars to your pockets if you have or had PPP money.

Before we go further, please note the PPP money comes to you in what appears to be a loan. We say “appears” because you typically pay back a loan.

Done right, however, the PPP loan is 100 percent forgiven. The word “loan” makes some businesses leery of this arrangement. Don’t be. The PPP monetary arrangement is a true “have your cake and eat it too” deal.

And this remarkable deal applies to your past PPP loan, the PPP loan you have outstanding, and the PPP loan you are about to get if you have not had one before. Here are the details.

Loan Proceeds Are Not Taxable

The COVID-related Tax Relief Act of 2020 reiterates that your PPP loan forgiveness amount is not taxable income to you.

Expenses Paid with Forgiven Loan Money Are Tax-Deductible

As you may remember, the IRS took the position that expenses paid with PPP loan forgiveness monies were not deductible.

Lawmakers disagreed but were unable to get the IRS to change its position. The IRS essentially told lawmakers, “If you want the expenses paid with a PPP loan to be deductible, change the law.”

And that’s precisely what lawmakers did. The COVID-related Tax Relief Act of 2020 states 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.”

In plain English, the expenses paid with monies from a forgiven PPP loan are now tax-deductible, and this change goes back to March 27, 2020, the date the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted.

New Stimulus Law Grants Eight Tax Breaks For 1040 Filers

As you doubtlessly know, Congress recently passed a massive new stimulus bill that was enacted into law on December 27, 2020. Most of the public’s attention has been focused on the bill’s authorization of additional stimulus checks and new PPP loans and other aid targeted to struggling businesses.

But Form 1040 American taxpayers who are not in business are struggling as well. The stimulus bill contains a hodgepodge of eight new or extended tax breaks intended to help Form 1040 taxpayers.

None of these tax breaks are earthshaking by themselves, but together they add up to a nice tax present for COVID-19-weary Americans.

Here are eight new tax breaks that can help you

  • deduct cash contributions to charity if you don’t itemize,
  • deduct up to 100 percent of your adjusted gross income (AGI) as a charitable deduction,
  • lengthen to one year the time you have to repay your 2020 employee Social Security taxes if you had them deferred by your employer,
  • deduct medical expenses in 2021 using the now-extended 7.5 percent of AGI floor for this deduction,
  • carry over unused flexible savings account (FSA) funds to next year,
  • use your 2019 income to qualify for the earned income tax credit and/or child tax credit if you’re a lower-income taxpayer,
  • deduct out-of-pocket expenses for personal protective equipment (PPE) if you’re a teacher, and
  • take advantage of the lifetime learning credit in 2021 if you’re a higher income taxpayer.

Home-Office Deduction – Show Me the Proof!

Question. If you have an office outside your personal home—say, downtown—can you have a tax-deductible office inside your home for the same trade or business?

Answer. Yes.

Q. Who says that?

A. The IRS.

Q. Show me where they say that!

In IRS Publication 587, the IRS says this:

Your home office will qualify as your principal place of business if you meet the following requirements:

  1. You use it exclusively and regularly for administrative or management activities of your trade or business.
  2. You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.

The quote above mirrors the law and the legislative history, as you will see below. Note the following points:

  • The administrative office is a “principal” office.
  • You must use this office exclusively for business.
  • You must use this office regularly for business.
  • You must do your administrative work in your home office.
  • You must not do your administrative work in the office outside the home.

Here is a second important quote from IRS Publication 587:

You can have more than one business location, including your home, for a single trade or business.

The IRS makes this rule very clear and straightforward: you may have more than one office for your business, including an office in your home.

Four Things To Know About Employing Your Spouse

If you own your own business and operate as a proprietorship or partnership (wherein your spouse is not a partner), one of the smartest tax moves you can make is hiring your spouse to work as your employee.

But the tax savings may be a mirage if you don’t pay your spouse the right way. And the arrangement is subject to attack by the IRS if your spouse is not a bona fide employee.

Here are four things you should know before you hire your spouse that will maximize your savings and minimize the audit risk.

1. Pay benefits, not wages. The way to save on taxes is to pay your spouse with tax-free employee benefits, not taxable wages. Benefits such as health insurance are fully deductible by you as a business expense, but not taxable income for your spouse.

Also, if you pay a spouse only with tax-free fringe benefits, you need not pay payroll taxes, file employment tax returns, or file a W-2 for your spouse.

2. Establish a medical reimbursement arrangement. The most valuable fringe benefit you can provide your spouse-employee is reimbursement for health insurance and uninsured medical expenses. You can accomplish this through a 105-HRA plan if your spouse is your sole employee, or an Individual Coverage Health Reimbursement Account (ICHRA) if you have multiple employees.

3. Provide benefits in addition to health coverage.There are many other tax-free fringe benefits you can provide your spouse in addition to health insurance, including education related to your business, up to $50,000 of life insurance, and de minimis fringes such as gifts.

4. Treat your spouse as a bona fide employee. For your arrangement to withstand IRS scrutiny, you must be able to prove that your spouse is your bona fide employee. You’ll have no problem if:

  • you are the sole owner of your business,
  • your spouse does real work under your direction and control and keeps a timesheet,
  • you regularly pay your spouse’s medical and other reimbursable expenses from your separate business checking account, and
  • your spouse’s compensation is reasonable for the work performed.