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Tax Cuts & Jobs Act (TCJA) November Update
November 14, 2018
Estimated Reading Time: 4 minutes 45 seconds
IRS Says TCJA Allows Client and Prospect Business Meal Deductions
In Notice 2018-76, the IRS states that client and prospect business meals continue as tax deductions under the Tax Cuts and Jobs Act. This is very good news indeed.
Under this new IRS guidance, you may deduct 50 percent of your client and prospect business meals if
- the expense is an ordinary and necessary expense under the Internal Revenue Code (IRC) Section 162(a) and is paid or incurred during the taxable year in carrying on any trade or business;
- the expense is not lavish or extravagant under the circumstances;
- the taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
- the food and beverages are provided to a current or potential business customer, client, consultant, or a similar business contact; and
- in the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
To prove your business meals, follow the two easy steps below:
- Keep the receipt that shows the name of the restaurant, the number of people at the table, and an itemized list of food and drinks consumed.
- On the receipt, record the name or names of the person or persons with whom you had the meal and also record the business reason for the meal.
In the event the receipt is not available, such as with the purchase of hot dogs and drinks at a baseball game while sitting in the stands, make sure to make a written note of the expenditures immediately after the game.
If you charge a business meal to a credit card, the credit card statement provides your proof of payment. When possible, always pay by credit card or write a check so that you have clear proof of payment.
Proof of payment is not proof of what you purchased, so in addition to proof of payment, keep the receipt with the notations as described earlier. With this combination of proof of payment and receipt with notations, you have what we call audit-proof documentation.
Defining “Real Estate Investor” and “Real Estate Dealer”
The first good news is that you can be both a real estate investor and a real estate dealer with respect to your real estate portfolio.
The next good news is that you are in control, and by knowing just a few rules about dealer and investor classifications, you can do much to increase your net worth.
Let’s take a quick look at how big a difference you can make in the tax bite. Say you have a $90,000 profit on the sale of a property.
- Dealer taxes could be as high as $46,017.
- Investor taxes could be as high as $18,000.
The investor potentially saves a whopping $28,017 in taxes.
You, the individual taxpayer, can be both a dealer and an investor! The law does not cut you in half or anything. No, the law simply looks at each property in its respective light. But you need to make the light shine on your properties by making a clear distinction in your books and records as to which properties are investment properties and which are dealer properties.
Should you fail to make the distinction, you place yourself at the mercy of the IRS. (The word “mercy” does not exist in the tax code, so expect a very unhappy result if you rely on mercy.) The courts look at your intent in buying and holding the property. Your books and records help establish that intent.
Dealer property is a property you hold for sale to customers in the ordinary course of a trade or business. The more properties you buy and the more properties you sell during a calendar year, the greater the chances that you are a dealer with respect to those properties.
Properties that you buy, fix up and sell generally are dealer properties. Also, properties that you subdivide have a great chance of being dealer property, except when those subdivisions are done under the very limited rules of Section 1237.
Where the dealer’s principal purpose for owning property is to sell it to customers in the ordinary course of business, the investor’s purpose in owning property is to
- have it appreciate in value, and/or
- produce rental income.
Each property stands alone with respect to its status as a dealer or an investment property. Thus, you (the individual taxpayer) or your corporation may own both dealer and investment properties. If you have both types of properties, make a clear distinction in your books and records as to which properties are investment properties and which are dealer properties.
Can You Deduct Defunct S Corporation Expenses?
Let’s say you dissolved your corporation, and then some unexpected corporate expenses arrived. You paid them personally because the corporation was no longer in business.
Guess what? No deduction. The corporation can’t pay the expenses because it no longer exists. The owner can’t pay the expenses and then deduct them because he didn’t incur those expenses inside a business that he operates in his personal name.
If you are going to shut down your S corporation, consider keeping the business open for an extra period of time to ensure you receive all income and pay all expenses, or make sure to resolve all potential accounts payable prior to closing the business.
Since you incur costs for keeping the S corporation open (tax return filings, state franchise taxes, etc.), you need to weigh the additional costs against any lingering accounts payable or other expense issues that could arise. If you are considering shutting down your S corporation, let’s talk before you do it.
GP CPA was featured on WCNC Charlotte about “Are Unemployment Benefits Taxable?”
We are glad to inform you that Justin Prusiensky, Chief Executive Officer of the GP CPA P.C. was featured on WCNC Charlotte coverage about “Are Unemployment Benefits Taxable”.
The Employee Retention Credit (ERC)
The Employee Retention Credit (“ERC”) has had some upgrades and retrofits to some of the basic calculations with the most recent (12.27.20) CARES Act changes.
Good Riddance, 2020
What is new in 2021? Meals in 2021 are once again 100% deductible, the next round of PPP funding is coming and the Employee Retention Credit (ERC) has been changed.
How to Persuade Clients to Change Banks. Listen to Justin Prusiensky’s Guest Appearance on the Relay Financial Webinar
Our expert accountant Justin Prusiensky was recently interviewed as a guest speaker by Relay Financial to discuss how to persuade clients to change banks.
What Tax Breaks Changed From 2018?
Congress extended some of the tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020. Learn more about tax breaks that have been extended.
Dear Client, I have good news!
Since we now have less than 90 days left in the year, kindly keep me apprised of when you expect the major revenue collections to be during the next few weeks and we can adjust accordingly.