Once you file your tax return, consider these 3 issues
The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).
So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.
Basic rules
Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.
Currently, the deduction for business meals is allowed if the following requirements are met:
- The expense is an ordinary and necessary business expense paid or incurred during the tax year in carrying on any trade or business.
- The expense isn’t lavish or extravagant under the circumstances.
- The taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished.
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
Provided by a restaurant
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.
However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:
- Grocery stores,
- Convenience stores,
- Beer, wine or liquor stores, and
- Vending machines or kiosks.
The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.
Keep good records
It’s important to keep track of expenses to maximize tax benefits for business meal expenses.
You should record the:
- Date,
- Cost of each expense,
- Name and location of the establishment,
- Business purpose, and
- Business relationship of the person(s) fed.
In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact your tax advisor.
© 2022
Fully deduct business meals this year
The federal government is helping to pick up the tab for certain business meals. Under a provision that’s part of one of the COVID-19 relief laws, the usual deduction for 50% of the cost of business meals is doubled to 100% for food and beverages provided by restaurants in 2022 (and 2021).
So, you can take a customer out for a business meal or order take-out for your team and temporarily write off the entire cost — including the tip, sales tax and any delivery charges.
Basic rules
Despite eliminating deductions for business entertainment expenses in the Tax Cuts and Jobs Act (TCJA), a business taxpayer could still deduct 50% of the cost of qualified business meals, including meals incurred while traveling away from home on business. (The TCJA generally eliminated the 50% deduction for business entertainment expenses incurred after 2017 on a permanent basis.)
To help struggling restaurants during the pandemic, the Consolidated Appropriations Act doubled the business meal deduction temporarily for 2021 and 2022. Unless Congress acts to extend this tax break, it will expire on December 31, 2022.
Currently, the deduction for business meals is allowed if the following requirements are met:
- The expense is an ordinary and necessary business expense paid or incurred during the tax year in carrying on any trade or business.
- The expense isn’t lavish or extravagant under the circumstances.
- The taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished.
- The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.
In the event that food and beverages are provided during an entertainment activity, the food and beverages must be purchased separately from the entertainment. Alternatively, the cost can be stated separately from the cost of the entertainment on one or more bills.
So, if you treat a client to a meal and the expense is properly substantiated, you may qualify for a business meal deduction as long as there’s a business purpose to the meal or a reasonable expectation that a benefit to the business will result.
Provided by a restaurant
IRS Notice 2021-25 explains the main rules for qualifying for the 100% deduction for food and beverages provided by a restaurant. Under this guidance, the deduction is available if the restaurant prepares and sells food or beverages to retail customers for immediate consumption on or off the premises. As a result, it applies to both on-site dining and take-out and delivery meals.
However, a “restaurant” doesn’t include a business that mainly sells pre-packaged goods not intended for immediate consumption. So, food and beverage sales are excluded from businesses including:
- Grocery stores,
- Convenience stores,
- Beer, wine or liquor stores, and
- Vending machines or kiosks.
The restriction also applies to an eating facility located on the employer’s business premises that provides meals excluded from an employee’s taxable income. Business meals purchased from such facilities are limited to a 50% deduction. It doesn’t matter if a third party is operating the facility under a contract with the business.
Keep good records
It’s important to keep track of expenses to maximize tax benefits for business meal expenses.
You should record the:
- Date,
- Cost of each expense,
- Name and location of the establishment,
- Business purpose, and
- Business relationship of the person(s) fed.
In addition, ask establishments to divvy up the tab between any entertainment costs and food/ beverages. For additional information, contact your tax advisor.
© 2022
AI for small to midsize businesses isn’t going away
Artificial intelligence (AI) has made great inroads into certain sectors of the U.S. economy. However, it hasn’t reached many small to midsize businesses (SMBs) in a major way … yet.
In 2021, AI analysis firm Unsupervised published a survey of 520 SMB owners that found 48% of them still found AI too cost prohibitive. Forty percent said their businesses lacked the staff expertise to use it. But the survey also found that one in five owners were implementing some form of AI, and 20% of respondents already using AI believed it had increased their profitability.
Defining the term
People sometimes confuse AI with data analytics or the application of intense mathematics. It’s so much more. AI generally refers to using computers to perform complex tasks typically thought to require human intelligence — for example, image perception, voice recognition, decision-making and problem solving.
Several types of technologies fall under the AI umbrella. One is machine learning, which applies statistical techniques to improve machines’ performance of a specific task over time with little or no programming or human intervention. Another is natural language processing, which uses algorithms to analyze unstructured human language in documents, emails, texts, conversation or otherwise. And a third is robotic process automation, which automates time-consuming repetitive manual tasks that don’t require decision-making.
Finding uses
Going back to the survey above, 28% of SMB owners said they were still determining precisely how to implement AI. The answer for your company depends on what you do and which technologies you rely on. Here are some examples of how businesses can use AI:
HR. AI software can significantly expedite the hiring process by soliciting and screening candidates. It can narrow the field and save interviewing time, freeing up HR staff to deal with other issues that require human attention. AI also might reduce the risk of discrimination claims because human subjectivity plays less of a role in the process.
Communications. Chatbots and other tools make it easier to maintain efficient and effective communications with customers and prospects. Specifically, these tools can respond to frequently asked customer service questions, allowing front-facing employees to focus on more targeted or complex issues.
Growing companies can also use AI tools to automate communications with vendors and employees. Doing so ensures the timely delivery of information and minimizes the chance of costly or embarrassing human errors.
Cybersecurity. Every company, no matter how big or small, faces the threat of hackers and ransomware schemes — and the risk has grown only more intense in recent months.
In fact, given the sheer number of cyberthreats out there, and the virtually infinite ways that cybercriminals can vary their attacks, AI is fast becoming an essential defensive tool. For example, through machine learning, AI can devise “classification algorithms” to detect spam and malware.
Proceeding with caution
AI for business — including SMBs — isn’t going away. Does this mean you should throw caution to the wind and spend exorbitantly on an AI solution today? Not at all. Like any technology initiative, an AI implementation project should involve careful research into your needs and a prudent budget. We can help you weigh the costs vs. benefits of any tech upgrades you’re considering.
© 2022
Tax considerations when adding a new partner at your business
Adding a new partner in a partnership has several financial and legal implications. Let’s say you and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to it. Let’s further assume that your bases in your partnership interests are sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your bases to zero.
Not as simple as it seems
Although the entry of a new partner appears to be a simple matter, it’s necessary to plan the new person’s entry properly in order to avoid various tax problems. Here are two issues to consider:
First, if there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change is treated as a sale of those items, with the result that the current partners will recognize gain. For this purpose, unrealized receivables include not only accounts receivable, but also depreciation recapture and certain other ordinary income items. In order to avoid gain recognition on those items, it’s necessary that they be allocated to the current partners even after the entry of the new partner.
Second, the tax code requires that the “built-in gain or loss” on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. Generally speaking, “built-in gain or loss” is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted.
The most important effect of these rules is that the new partner must be allocated a portion of the depreciation equal to his share of the depreciable property based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other effect is that the built-in gain or loss on the partnership assets must be allocated to the current partners when partnership assets are sold. The rules that apply here are complex and the partnership may have to adopt special accounting procedures to cope with the relevant requirements.
Keep track of your basis
When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s imperative to keep proper track of your basis because it can have an impact in several areas: gain or loss on the sale of your interest, how partnership distributions to you are taxed and the maximum amount of partnership loss you can deduct.
Contact us if you’d like help in dealing with these issues or any other issues that may arise in connection with your partnership.
© 2022