The COVID-19 relief package that Congress agreed to last month provides many useful tax breaks, but accountants are also wondering about the applicability of some of the breaks, such as claiming restaurant meals as business deductions.
Evan Morgan, director of tax services at Top 100 Firm Kaufman Rossin, is advising his small-business clients to take advantage of various tax credits and extenders, including the Employee Retention Tax Credit, the Work Opportunity Tax Credit, the Health Coverage Tax Credit, and the five-year extension of the New Markets Tax Credit at $5 billion per year.
“A lot of things were extended,” he said. “This is a big package of extensions. Some items were extended for one year and some items were extended for five years.”
The Honorable Eugene A. Ludwig, the 27th comptroller of the currency, is a business and civic leader and expert on banking, regulation, risk management and fiscal policy. Mr. Ludwig is managing partner of Canapi Ventures, a venture capital firm focused on investments in early to growth-stage fintech companies, and CEO of Ludwig Advisors, which counsels financial firms on critical matters. He is the founder and former CEO and chairman of Promontory Financial Group, where he was an IBM executive after the firm was acquired in 2016. He is also the founder and former CEO and chairman of Promontory Interfinancial Network (now IntraFi Network), an early fintech company with approximately 3,000 bank members. Under his leadership, the Promontory family of companies became synonymous with excellence in compliance, risk management and financial services innovation.
In 2019, Mr. Ludwig founded the Ludwig Institute for Shared Economic Prosperity, or LISEP, a nonprofit organization dedicated to improving the economic well-being of middle- and lower-income Americans. Its research includes new economic indicators for unemployment, earnings and cost of living. LISEP's statistics aim to provide policymakers and the public a more transparent view into the economic situation of all Americans as compared with traditional metrics. He co-founded the Carol and Gene Ludwig Family Foundation, which provides grants to organizations that accelerate medical and scientific discovery in neurodegenerative diseases and enable access to educational and economic opportunity for young people.
Mr. Ludwig was previously vice chairman and senior control officer of Bankers Trust New York Corp., then the fifth largest U.S. banking organization. He was instrumental in steering the firm through its landmark merger with Deutsche Bank.
As comptroller from 1993 to 1998, Mr. Ludwig served as the Clinton administration's chief banking regulator and point person on the policy response to the credit crunch of the early 1990s. He fashioned an 11-point plan that was instrumental in ending the crunch and helping banks begin to lend again and fulfill their role of supporting the economy. He modernized and revised the bank regulatory framework, leading a multi-agency effort to overhaul the Community Reinvestment Act. Under his purview, lending to low- and moderate-income Americans increased tenfold, as did national bank investments in community development corporations. He brought the first fair-lending case in the nation and over the course of his leadership, 27 cases in all, resulting in tens of millions of dollars in fines against violators.
While he was comptroller, Mr. Ludwig served as chairman of the Federal Financial Institutions Examination Council, a member of the Basel Committee on Banking Supervision, a director of the Federal Deposit Insurance Corporation and chairman of the Neighborhood Reinvestment Corporation.
Mr. Ludwig was previously a partner at Covington & Burling, specializing in banking law. He has been a guest lecturer at multiple colleges and universities, including Yale and Harvard's law and business schools and Georgetown's International Law Institute.
Given his unique perspective as a regulator, lawyer, banker, business leader and trusted advisor to leading financial institutions, he is a sought-after thought leader. His pieces have been published in The Financial Times, The New York Times, The Atlantic, The Wall Street Journal, The Washington Post, Politico, Democracy Journal, American Banker, Time, Newsweek, Bloomberg, and on CNBC.com. His book, "The Vanishing American Dream," was published in September 2020.
Gene was born in Brooklyn, New York, and raised in York, Pennsylvania. He graduated magna cum laude from Haverford College and received a scholarship to Oxford University, where he earned a Master of Arts degree as a Keasbey Fellow. He earned a J.D. from Yale University, where he was editor of the Yale Law Journal and chairman of Yale Legislative Services.
Ira S. Rosenbloom is chief operating executive of Optimum Strategies, which improves the performance, profitability and succession options of small and midsized accounting practices across the Mid-Atlantic region.
The five-year extensions will help provide more certainty for tax planning with clients. “Our issue for the last several years is that Congress comes up with these last-minute tax plans, and it’s very difficult for clients that want to plan anything more than three to six months in advance,” said Morgan. “It’s very difficult to do appropriate tax planning, because we’re never sure what Congress is going to do. There’s a lot of uncertainty now about some of the proposals that President-elect Biden has discussed on the campaign trail and whether those are going to happen or not. We really don’t know.”
The package includes a short-term extension on sick leave and family leave, but not for long. “The employer credit for paid sick and family leave was set to expire in 2020, but it was extended to March 31, 2021, and then the Employee Retention Tax Credit, compensation paid to a covered employee, is through June 30, 2021,” said Morgan. “Those are part of the extensions.”
Biden was scheduled to unveil his economic plans Thursday, and chances are that pressing issues like getting the COVID-19 pandemic under control will take priority over tax reform.
“That’s what I’ve been counseling clients who are afraid of retroactive tax increases. If there’s any more tax legislation, it’s going to be the middle of the year, easily, and I think it’s highly unlikely that they will make anything retroactive to Jan. 1, 2021, at that point,” said Morgan. “More likely, if there is some change, it would take effect in 2022.”
One tax break he is encouraging clients to look at is the charitable deduction. “A big item that affects both individuals and businesses is that they extended the change for charitable contributions, so people who don’t itemize their deductions can still take a $300 above-the-line charitable contribution deduction in 2021,” said Morgan. “Also for 2021, the AGI limitation on people who do itemize rises to 100 percent. That’s a pretty big one that’s going to affect a lot of people. People that give to charity will be able to get at least some benefit from it.”
There’s also a break for people who have to dip into their retirement accounts to pay for their current needs. “There’s a change to the penalty tax when people have to take money out of their retirement plans to live off their savings,” said Morgan. “If they can show it’s a qualified coronavirus-related distribution, they’re waiving the 10 percent penalty tax. They have three years to repay. If you take money out of your plan, you can either pick it up in income over three years or you can pay it back to your plan without having to pay tax on it.”
A more controversial provision in the stimulus deal is allowing businesses to write off the costs of meals and entertainment, which President Trump pushed as a priority for helping the ailing restaurant industry.
“In 2021 and 2022 we’re going back to 100 percent allowance for deductions for business meals,” said Morgan. “But they have to be served at a restaurant. I’m not exactly sure what that means at this point. For example, when you’re taking a client to a baseball game, to events and things like that, is that considered a restaurant?”
Howard Wagner, a partner in the Washington National Tax Practice at Top 10 Firm Crowe, has also been scrutinizing the temporary allowance of the full business meal deduction. “That is only for meals provided by a restaurant, so the question is what is the definition of a restaurant,” he said. “If you think of going to a restaurant in a traditional setting, absolutely. If you rent a suite at a sporting event and you’re billed separately for the food, does the catering operation at the baseball game count as a restaurant, or is that not a restaurant for purposes of the full deduction?”
He hopes to see further guidance from the IRS on exactly what venues will be permitted. “The question is, if I go to a hotel for a business meeting and I pay for the meals from the catering operation of the hotel, is that a restaurant?” said Wagner. “You’ve still got the ‘not lavish or extravagant’ standard in the Section 274 rules. When you start talking about people abusing it, this is kind of nibbling around the edges.”
