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.”
Mark Bodenstab is a director of research & development tax credit services at KBKG, operating out of New Hampshire. He brings knowledge of many aspects of R&D from his 20+ years in the private sector as well as 14 years with the Internal Revenue Service. He joined the IRS as a general engineer to provide technical and valuation support in the examination of large corporate tax filings. He has experience in a wide range of engineering issues, including the complicated credit for increasing research. He was selected as a manager to supervise a team of IRS engineers and appraisers. During this time, he also served in a national role as staff assistant to the director of field operations. Prior to the IRS, he worked for over 20 years in the industrial gas industry, gaining first-hand experience in research and development testing and improving products and processes. He was involved with the early-stage development and delivery of cryogenic services for the magnetic resonance imaging (MRI) marketplace, container pressurization in the national beverage marketplace, and the manufacturing and delivery of pipeline atmospheric gases to multiple chemical, steel and glass manufacturers.
So far there have been over 200 COVID-19-related disclosures, according to Diver by Lumesis, a financial technology company.
One possible move is getting rid of the limit on state and local tax deductions, or SALT, that was part of the 2017 tax overhaul.
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.”
