Tax News

If you’ve splurged on expensive meals for business associates or sprung for high-priced tickets to sporting events or concerts for clients in the past, take heed: the tax deductions aren’t what they used to be.

Prior to the Tax Cuts and Jobs Act (TCJA) of 2018, businesses could deduct up to 50% of entertainment and meal expenses, provided they were associated with conducting or discussing business. The TCJA eliminated the deduction for most forms of entertainment but allowed taxpayers to continue deducting 50% of the cost of business meals.

In 2021, the Consolidated Appropriations Act (CAA) allowed businesses to deduct 100% of certain business meal expenses in 2021 and 2022. But the deduction was temporary, designed to boost the restaurant industry during COVID.

As of 2023, deductions are now back where they were prior to 2021. The majority of business meals are now 50% deductible, and most entertainment expenses are not deductible at all.

What’s Deductible in 2023

Exactly what is deductible, and to what extent, depends on the circumstances. Following are some general guidelines:

100% Deductible

• Food for recreational employee events, such as holiday parties, summer picnics, or team-building events
• Food provided to the public to promote goodwill (e.g., snacks or coffee for customers)
• Food for events in support of a charitable cause
• Meals that are an essential part of your business function (for example, if you’re a food critic or food blogger)
• Meals provided to the employees for the convenience of the employer (e.g., dinner for employees who work late at the office)
• Meals included as taxable compensation to employees or independent contractors
• Meals sold to a client or customer

50% Deductible

• Business meals
• Meals provided in-office for meetings of employees, stockholders, agents, or directors
• Employee meals at a company cafeteria if the annual revenue of the facility is equal to or greater than the costs
• Food items, such as soda, coffee, or snacks, for employees
• Meals while traveling for work
• Meals at a conferences

Not Deductible

• Entertainment

The Internal Revenue Code defines entertainment as “any activity which is of a type generally considered to constitute entertainment, amusement, or recreation, such as entertaining at night clubs, cocktail lounges, theaters, country clubs, golf, and athletic clubs, sporting events, and on hunting, fishing, vacation, and similar trips….”

Note that you also cannot deduct the costs of renting out an entertainment facility or the cost of membership dues.

Exceptions

Entertainment and meals that are part of your actual business may be deductible. For example, if you own a piano bar, the cost of the piano player would probably be deductible. Similarly, if you are a food blogger or a theater critic, you should be able to deduct the cost of meals or plays that you are actively reviewing.

You may be able to deduct meals at entertainment events if the costs can be separated. For example, while the cost of renting a room at a country club for a business function most likely isn’t deductible, the cost of catering for that function might be.

Criteria for Deductions

To deduct business meals, you must be self-employed or operating a business. As of 2018, employees with W2 jobs do not qualify for business meal deductions.

Business meals can be deducted only when the taxpayer or an employee is present at the meal along with a current or potential client, business contact, or consultant. Meals for guests, such as spouses, are not deductible. 

In most cases, meals must be provided by a restaurant or, in the case of larger events, a caterer, to be eligible. Food purchased at a grocery or convenience store is not deductible.

In all cases, the meal must not be “lavish or extravagant” relative to the business context.

Documenting Deductions

You should keep receipts for any business meal over $75, and you should keep a record of all business meals, regardless of cost. Records should include:

• The date of the meal
• Purpose of the meal as it relates to business
• Names, titles, and affiliations of people who attended
• Name of the venue
• Total amount of the bill, including tax and tip.

Crypto Donated to Charity

Issue – Is a qualified appraisal required for a charitable contribution of cryptocurrency?

Chief Counsel Memorandum (CCM) 202302012 presents and answers this question, with a “Yes”.  Here is the CCM’s reasoning:

FACTS presented in the CCM:  Taxpayer A is an individual who purchases units of Cryptocurrency B for personal investment purposes.  Taxpayer A later transferred all of her units to a charitable organization.  On her self-prepared Federal tax return, she claimed a $10,000 deduction. The amount was based on a value listed on the cryptocurrency exchange at the date and time of the donation.  Taxpayer A did not attempt to obtain an qualified appraisal to support the deduction.

IRS RESPONSE - Notice 2014-21 describes cryptocurrency as “property” and that general tax principles applicable to property apply to cryptocurrency.  A deduction for a charitable donation of property of more than $5,000 requires a qualified appraisal according to IRC section 170(f)(11)(C).

Regulation 1.170A-16(d)(2)(i) gives an exception to this “qualified appraisal” requirement for donations of certain readily valued property specifically set forth in the Code and regulations.  The property “specifically set forth” are:  cash, stock in trade, inventory, property primarily held for sale to customers in the ordinary course of business, publicly traded securities, intellectual property, and certain vehicles.  The CCM states cryptocurrency is not included in this list of items, therefore, does not meet this exception.

IRC section 170(f)(11)(A)(ii)(II) provides that failure to meet these appraisal requirements will not result in denial of the deduction if it is shown that the failure to meet the requirements is due to reasonable cause and not to willful neglect.

RESULTS - Taxpayer A was denied the deduction because:

1) Taxpayer A did not obtain a qualified appraisal and the property was not one of the “specifically set forth” items.

2) Taxpayer A did not have reasonable cause for failing to obtain the appraisal.

The Internal Revenue Service today issued a renewed warning urging people to carefully review the Employee Retention Credit (ERC) guidelines before trying to claim the credit as promoters continue pushing ineligible people to file.

The IRS and tax professionals continue to see third parties aggressively promoting these ERC schemes on radio and online. These promoters charge large upfront fees or a fee that is contingent on the amount of the refund. And the promoters may not inform taxpayers that wage deductions claimed on the business' federal income tax return must be reduced by the amount of the credit.

"While this is a legitimate credit that has provided a financial lifeline to millions of businesses, there continue to be promoters who aggressively mislead people and businesses into thinking they can claim these credits," said Acting IRS Commissioner Doug O'Donnell. "Anyone who is considering claiming this credit needs to carefully review the guidelines. If the tax professional they're using raises questions about the accuracy of the Employee Retention Credit claim, people should listen to their advice. The IRS is actively auditing and conducting criminal investigations related to these false claims. People need to think twice before claiming this."

The IRS has been warning about this scheme since last fall, but there continue to be attempts to claim the ERC during the 2023 tax filing season. Tax professionals note they continue to be pressured by people wanting to claim credits improperly. The IRS Office of Professional Responsibility is working on additional guidance for the tax professional community that will be available in the near future.

People and businesses can avoid this scheme, and by not filing improper claims in the first place. If the business filed an income tax return deducting qualified wages before it filed an employment tax return claiming the credit, the business should file an amended income tax return to correct any overstated wage deduction.

Businesses should be cautious of advertised schemes and direct solicitations promising tax savings that are too good to be true. Taxpayers are always responsible for the information reported on their tax returns. Improperly claiming the ERC could result in taxpayers being required to repay the credit along with penalties and interest.

The SECURE 2.0 Act of 2022 is Division T of the Consolidated Appropriations Act of 2023 (Public Law 117-183), signed by President Biden on December 29, 2022.

DELAY IN RMD STARTING DATE (Act section 107) - The new RMD starting date is:

A.  Age 73 for anyone who is attains age 72 AFTER December 31, 2022 and attains age 73 BEFORE January 1, 2033.  (This means anyone who is turning 72 during 2023 and was anticipating having to start their RMDs for 2023, will have one more year before they have to start.)

B.  Age 75 for anyone who attains age 74 AFTER December 31, 2032.