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Because people are living longer now than ever before, many individuals are serving as care providers for elderly loved ones (such as parents or spouses) who cannot live independently. Such individuals often have questions regarding the tax ramifications associated with the cost of such care. For these individuals, the cost of such care may be deductible as a medical expense. Of course, any eligible deduction would be claimed by the person receiving the care if he or she is the one who pays the expenses. If someone else is paying the costs, that person may qualify to claim the deduction as explained below for “Medical Dependent.” 

Incapable of Self-Care – A person is considered incapable of self-care if, as a result of a physical or mental defect, that person is incapable of fulfilling his or her own hygiene or nutritional needs or if that person requires full-time care to ensure his or her own safety or the safety of others. 

Assisted-Living Facilities – Generally, the entire cost of care at a nursing home, home for the aged, or assisted-living facility is deductible as a medical expense, provided that the person who lives at the facility is primarily there for medical care or is incapable of self-care. This includes the entire cost of meals and lodging at the facility. On the other hand, if the person is living at the facility primarily for personal reasons, then only the expenses that are directly related to medical care are deductible, and the cost of meals and lodging is not a deductible medical expense. 

Home Care – A common alternative to nursing homes is in-home care, in which day helpers or live-in caregivers provide care within the home. The services that these caregivers provide must be allocated into (nondeductible) household chores and (deductible) nursing services. These nursing services need not actually be provided by a nurse; they simply must be the same services that a nurse would normally provide (e.g., administering medication, bathing, feeding, and dressing). If the caregivers also provide general housekeeping services, then the portion of their pay that is attributable to household chores is not deductible. 

The emotional and financial aspects of caring for a loved one can be overwhelming, and as a result, caregivers often overlook their burdensome tax and labor-law obligations. Sadly, these laws provide for no special relief from these tasks. 

Is the Caregiver an Employee? – Because of the way that labor laws are written, it is important to determine if an in-home caregiver is an employee. The answer to this question can be very subjective. Caregivers’ services can be obtained in a number of ways: 

• Agency-provided caregivers are employees of the agency, which handles all the responsibilities of an employer. Thus, loved ones do not have any employment-tax or payroll-reporting responsibilities; however, such caregivers generally come at a substantially higher cost than others. 
• Household workers are typically classified as employees andare subject to Social Security and Medicare taxes. The employer is responsible for withholding the employee’s share of these taxes and paying the employer’s share of payroll taxes. Fortunately for these employers, the special rules for household employees greatly simplify the payroll-withholding and income-reporting requirements. Any resulting federal payroll taxes are paid annually in conjunction with the employer’s individual 1040 tax return. Federal income-tax withholding is not required unless both the employer and the employee agree to do so. However, the employer is still required to issue a W-2 to the employee and to file that form with the federal government. The employer also must obtain federal and state employer ID numbers for reporting purposes.Some states have special provisions for the annual reporting and payment of state payroll taxes; these may be like the federal requirements. Other states have no special provisions and the household employee must be treated the same as an employee of a business.Household employers may find it easier to engage a payroll service that is knowledgeable in household employees, often referred to as Nanny Payroll Services, to handle the hassles of payroll and associated reporting paperwork.

  The employer’s portion of all employment taxes (Social Security, Medicare, and both federal and state unemployment taxes) related to deductible medical expenses are also deductible as a medical expense. 

You may be thinking, “Wait a minute – the household employers I know pay in cash and do not pay payroll taxes or issue W-2s to their household employees.” This observation may be accurate, but such behavior is illegal, and it is not right to ignore the law. Think about what could happen if one of your household employees is injured on your property or if you dismiss such an employee under less-than-amicable circumstances. In such circumstances, the household employee will often be eager to report you to the state labor board or to file for unemployment compensation. 

Note, however, that gardeners, pool cleaners, and repair people generally work on their own schedules, invest in their own equipment, have special skills, manage their own businesses, and bear the responsibility for any profit or loss. Such workers are not considered household employees. 

Here are some additional issues to consider: 

Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay for any work beyond 40 hours in a given week. However, live-in employees are an exception to this rule in most states. 

Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried. 

Separate Payrolls – Business owners may be tempted to include their household employees on their companies’ payrolls. However, any payments to household employees are personal expenses and thus are not allowable as business deductions. Thus, business owners must maintain separate payrolls for household employees; in other words, personal funds (not business funds) must be used to pay household workers. 

Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When a household employee is hired to work on a regular basis, the employer and employee each must complete Form I-9 (Employment Eligibility Verification). The employer must carefully examine the employee’s documents to establish his or her identity and employment eligibility. 

Employee Retirement Benefits – Although not a requirement for hiring household help, a recent tax law change permits employers of domestic employees (e.g., nannies and caregivers of adults) to provide retirement benefits for such employees under a Simplified Employee Pension plan effective in 2023 and later years. 

Medical Dependent –Generally, to claim a deduction for medical expenses, the taxpayer must have incurred the expense for him- or herself, a spouse or a dependent. An individual (other than a qualifying child) will qualify as a dependent of the taxpayer if the individual is related to the taxpayer or lives with the taxpayer all year, has gross income of less than $4,700 (for 2023), doesn’t file a joint return, and receives more than half their total support for the year from the taxpayer. However, there is an exception for a “medical dependent” that allows the taxpayer to include the medical expenses they paid for an individual who would have been their dependent except that the individual received gross income of $4,700 or more or the individual filed a joint return for the year. 

If you have questions related to eldercare or about how your state deals with related employment issues – or if you would like assistance in setting up a household payroll system – please contact this office.  

At the end of 2022, the Pennsylvania Department of Revenue launched a new online system for business taxpayers. myPATH, which has been available to individual taxpayers since June 2022, replaces E-TIDES as a full-service system for business taxpayers to handle their registration, filing and payments. As of February 24, 2023. E-TIDES will no longer be available. It is imperative that taxpayers create a myPATH account now, or they may be unable to make upcoming payments by their due dates.

Setting up a myPATH account is simple, and you will be able to migrate data from your E-TIDES account to your myPATH.

The Department of Revenue has provided several helpful tools to assist with the transition, including:

• A video tutorial on migrating E-TIDES
• myPATH Video Tutorials
•  myPATH Information page with details about the system and answers to common questions
• Online Customer Service Center where users can search for answers and support articles
• PATHfinder, a chatbot that provides users with myPATH support
  • To access this tool click the link and look for the blue and gold “myPATH Chat” icon in the upper right corner

It is important to note that after February 24, E-TIDES will no longer be available. All taxpayers must use their myPATH account. Please reach out to your RBF tax professional with any questions regarding these changes. We are always happy to help!

If your business is planning to buy, build or substantially improve real property, a cost segregation study can help you accelerate depreciation deductions, reducing your taxes and boosting your cash flow. Even if you’ve invested in real property in previous years, you may have an opportunity to do a lookback study and catch up on the deductions you missed.

How it works

Generally, commercial real property (other than land) is depreciable over 39 years, and residential real property is depreciable over 27.5 years. A cost segregation study identifies real estate components that are properly treated as personal property depreciable over, say, five or seven years, or land improvements depreciable over 15 years. By allocating a portion of your costs to these shorter-lived assets, you can accelerate depreciation deductions and substantially reduce your tax bill. And if these assets qualify for bonus depreciation, the tax savings can be even greater.

In some cases, assets that qualify as personal property are apparent. Examples include furniture, fixtures, equipment and machinery. But often, property eligible for accelerated depreciation is less obvious. For example, building components that ordinarily would be treated as real property depreciable over 39 years may be classified as five- or seven-year property if they’re essential to special business functions.

An example: A manufacturing company built a $20 million factory and placed it in service in June 2021. To accommodate its manufacturing processes, the design called for a reinforced foundation, specialized electrical and plumbing systems, and other structural components closely related to manufacturing functions.

A cost segregation study supports allocation of $6 million of the factory’s cost to these components, which are depreciable over seven years rather than 39 years. As a result, the company increases its depreciation deductions by approximately $774,000 in Year 1, $1.05 million in Year 2 and $895,000 in year three (not counting any available bonus depreciation).

Recovering deductions

Suppose you invested in a building several years ago but allocated the entire cost to real property. Depending on how much time has passed and the documentation you have available, it may be possible to conduct a lookback study and reallocate a portion of the cost to shorter-lived personal property. Applying to the IRS for a change in accounting method may allow you to claim a catch-up deduction for the extra depreciation deductions you missed over the years.

Is it right for you?

Are you wondering if a cost segregation study would pay off for your business? Your tax advisor can help you weigh the potential tax savings against the cost of a study.

© 2021

As you gear up for the 2022 tax filing season, there are some challenges and changes of which you should be aware.

1. Significant IRS Delays – 

The tax bureau is incredibly overburdened due to understaffing, technology woes, and myriad complications arising from COVID-19 pandemic. “CPA tax professionals greeted the launch of tax season with skepticism that the IRS will be able to contend with its continuing logistical challenges,” explains a recent article from the Journal of Accountancy, “with taxpayers and their preparers likely to experience more frustration and delay.”

2. Rebate for the Third Economic Impact Payment – 

Taxpayers who received no payment or partial payment of the $1,400 third stimulus payment can claim it on their 2021 tax return using the Recovery Rebate Credit. In order to know how much to claim, refer to Letter 6475 from the IRS (expected to go out in early 2022) which details the amount of your third stimulus payment. Alternatively, you can determine your stimulus payment amount using your IRS.gov online account.

3. Changes to the Child Tax Credit – 

Firstly, the child tax credit increased significantly by the American Rescue Plan Act of 2021 (ARPA)—it was raised from a maximum of $2,000 per child to $3,000 per child aged six or older and $3,600 for children under six. On top of that, half of the tax credit was paid in advance in installment payments to qualifying families in 2021.

Taxpayers who received advance monthly child tax credit payments should be on the lookout for Letter 6419 from the IRS detailing the total amount of payments that they received in 2021. If you received advance payments, there are three possible outcomes for these you:

• You received the correct amount of advance payments. In this case, you simply need to report the advance payments you received and apply the remaining half of the child tax credit to your tax return.
• You received less of an advance payment than you were entitled to. In this case, you will report the amount that you did receive and will then apply the remaining half of the child tax credit, plus the additional amount you are owed, to your tax return.
• You were given more advance payment than you were entitled to. In this case, you will report the amount that you did receive and then your tax return will be lowered by the amount that you received in excess of what you were entitled to.

For further details on this topic, visit the 2021 Child Tax Credit and Advance Child Tax Credit Payments FAQ on IRS.gov.

4. Deducting Charitable Contributions Without Itemizing

For 2021, taxpayers who take the standard deduction (rather than itemizing) can still deduct up to $300 for donations to qualifying charities ($600 for married couples filing jointly). Additionally, taxpayers who do itemize can claim charitable contribution deductions for cash contributions up to 100% of their adjusted gross income (AGI). Usually, the deduction is limited to 50% of AGI.

As always, please do not hesitate to reach out to your Ross Buehler Falk & Comapny tax advisor with any questions or concerns regarding the items listed above. We are eager to work with you to ensure that you maximize your return and minimize your tax burden.

Yearly performance evaluations just might be heading out the door, according to a recent WorkHuman Analytics & Research Institute Survey. Findings reveal that these appraisals are less than effective and used less often. Based on select findings, 55 percent of employees responded that yearly evaluations don’t help them become better in their role. Almost as many, 53 percent, indicated that annual reviews recognize an employee’s complete workload. The survey also found that only 54 percent of businesses used annual reviews in 2019, compared to 82 percent of workers saying their employer used annual reviews in 2016.

According to Gallup, only 14 percent of workers responded positively that performance reviews motivated them to get better at their skill set. It also found that among businesses with 10,000 workers, time taken for performance evaluations reduced employee productivity by at least $2.4 million and up to $35 million. It also found that one-third of workers’ output and quality declined.

When it comes to traditional performance reviews, many employees believe they are run by managers with little regard for any employee input whatsoever. However, there are other ways to evaluate an employee: the worker can evaluate themselves; their co-workers can appraise them; or a combination of a self-, peer- and manager-focused assessment can be used.

As Harvard Business Review explains, since traditional performance reviews are mutually stressful for managers and their subordinates, there are a few recommendations to attempt to make it a more productive experience.

The first recommendation is to set initial, mutual expectations for the manager and employee. When the year begins, the business’ performance requirements should be detailed for the employee so that expectations are clear. By setting performance objectives with the employee, the manager and business will ensure that employees are answerable for their performance.

The second step is to prepare for the in-person evaluation as it gets closer to the meeting. Two weeks before the in-person evaluation, HBR recommends that workers and managers review their past accomplishments – good, bad, etc. Managers could also ask for objective co-workers’ assessments of the employee’s work to garner different perspectives on their performance.

Before a face-to-face meeting, give the employee the assessment to let them internalize it and let their emotions settle before the discussion. From there, the atmosphere should be established by the manager. When it comes to competent, high performers, managers should keep the reviews on the workers’ accomplishments and progression at the company, along with concerns they might have in their role. For poor performers, putting the focus on accountability and improved results is the recommended route.

Asking employees what’s working and what’s not working can be helpful for both manager and employee. It’s also recommended to point out what specific actions employees should take to keep improving, rather than using generalities.

Based on the evolution of how and where work is being conducted, it seems that the annual performance review needs to be re-evaluated and updated. Only time will tell how it will change, but based on what’s not working, it will evolve as the workplace moves deeper into the 21^st century.

Sources

https://www.workhuman.com/press-releases/White_Paper_The_Future_of_Work_is_Human.pdf

https://hbr.org/2011/11/delivering-an-effective-perfor

If you pay $250 a month for cable and premium channels, that’s $3,000 a year. Over a 30-year period, the total cost would be $90,000.

We don’t tend to think about how much we pay in regular expenses over the long term. However, that’s how various industry analysts report the cost of healthcare during retirement. Recent estimates for a retiring 65-year-old couple fall between $300,000 and $400,000 to cover healthcare expenses in retirement. At first glance, that’s an intimidating number and implies that pre-retirees need to have this much saved by the time they retire.

Fortunately, when you break down the numbers, that’s not the case. First of all, that estimate includes premiums for Medicare with prescription drug coverage, which is typically deducted from Social Security benefits before they ever hit your bank account. According to T. Rowe Price, Medicare premiums account for 76 percent to 82 percent of most retirees’ healthcare expenses, so a large portion of these costs are paid for outside of your household budget.

The true cost of retiree healthcare expenditures is based on how healthy you remain during retirement. And actually, that’s not necessarily related to savings – it’s more a combination of genetics and peoples’ penchant for healthy living before and during retirement. However, it’s always best to prepare for the worst, so the more money you save and earmark for healthcare expenses, the better off you’ll be.

One way to control your monthly premiums in retirement is to shop and compare Medicare plans each year during open enrollment. It helps to keep a running tab of your out-of-pocket expenses each year so that you can increase your Medicare coverage if your costs start trending higher. Higher coverage might mean higher premiums, but that will lower out-of-pocket costs each year.

The following guide was developed by T. Rowe Price. It estimates how much retirees spend based on different types of Medicare plans using 2021 premiums and data from the Health and Retirement Study (HRS). Among retirees who enroll in either (1) Medicare Parts A, B, and D; (2) Medicare Advantage HMO and Drug Plan; or (3) Medicare Parts A, B, D, and Medigap:

• 25 percent will pay less than $500/year in out-of-pocket expenses
• 50 percent will pay less than $1,200/year in out-of-pocket expenses
• 25 percent will pay more than $1,900/year in out-of-pocket expenses
• 25 percent will pay more than $3,900/year in out-of-pocket expenses

As for paying those out-of-pocket expenses, remember that you pay them over time, so it’s not as if you’re paying a large lump sum all at once. One strategy is to fund a savings account with enough money to pay out-of-pocket expenses for the year, based on your prior year’s spending. Then replenish this account each year from other funding sources, such as an annual required minimum distribution (RMD) from a retirement account.

If you have access through your current health plan, pre-retirees can save for healthcare expenses with a health savings account (HSA). Contributions are tax deductible and, over time, you can invest your savings for earnings accumulation. These funds, including investment gains, are never taxed as long as they are used to pay eligible healthcare expenses. The account is particularly useful if you don’t tap it until retirement when the money can be used to pay for things like dental and vision care, hearing aids, long-term care insurance premiums, and nursing home costs.

Despite those alarming projections about how much healthcare will cost you in retirement, remember that it can be manageable because it is paid out over time.

One of the fallouts of the COVID-19 pandemic is that millions of people have dropped out of the workforce, particularly female workers with families. While they remain unemployed, these women will have lost the opportunity to build up their retirement nest egg through their employers’ retirement plans. However, those who are married have an option to accumulate retirement funds that will help make up for some of their lost retirement savings.

This frequently overlooked tax benefit is the spousal IRA. Generally, IRA contributions are only allowed for taxpayers who have compensation (the term “compensation” includes wages, tips, bonuses, professional fees, commissions, taxable alimony received, and net income from self-employment). Spousal IRAs are the exception to that rule and allow a nonworking or low-earning spouse to contribute to his or her own IRA, otherwise known as a spousal IRA, as long as his or her spouse has adequate compensation.

The maximum amount that a nonworking or low-earning spouse can contribute to either a traditional or Roth IRA (or a combination) is the same as the limit for a working spouse, which is $6,000 for 2021. If the nonworking spouse is 50 years or older, that spouse can also make “catch-up” contributions (limited to $1,000), raising the overall contribution limit to $7,000. These limits apply provided that the couple together has compensation equal to or greater than their combined IRA contributions.

Example: Tony is employed, and his W-2 for 2021 is $100,000. His wife Rosa, age 45, didn’t work during the year after deciding to care for their children at home due to their difficulty finding childcare providers. Since her own compensation of zero is less than the contribution limit for the year, Rosa can base her contribution on their combined compensation of $100,000. Thus, Rosa can contribute up to $6,000 to an IRA for 2021. Even if Rosa had done some part-time work and earned $2,500, she could still make a $6,000 IRA contribution.

The contributions for both spouses can be made either to a traditional or Roth IRA or split between them as long as the combined contributions don’t exceed the annual contribution limit. Caution: The deductibility of the traditional IRA and the ability to make a Roth IRA contribution are generally based on the taxpayer’s income:

• Traditional IRAs – There is no income limit restricting contributions to a traditional IRA. However, if the working spouse is an active participant in any other qualified retirement plan, a tax-deductible contribution can be made to the IRA of the nonparticipant spouse only if the couple’s adjusted gross income (AGI) doesn’t exceed $198,000 in 2021. If the couple’s income is $198,000 to $208,000, only a partial deduction is allowed. Once their AGI reaches $208,000, no amount is deductible.
• Roth IRAs – Roth IRA contributions are never tax-deductible. Contributions to Roth IRAs are allowed in full if the couple’s AGI doesn’t exceed $198,000 in 2021. The contribution is ratably phased out for AGIs between $198,000 and $208,000. Thus, no contribution is allowed to a Roth IRA for 2021 once the AGI exceeds $208,000.

Example: Rosa from the previous example can designate her IRA contribution as either a deductible traditional IRA or a nondeductible Roth IRA because the couple’s AGI is under $198,000. Had the couple’s AGI been $203,000, Rosa’s allowable contribution to a deductible traditional or Roth IRA would have been limited to $3,000 because of the phaseout. The other $3,000 could have been contributed to a traditional IRA and designated as nondeductible.

Contributions to IRAs for 2021 can be made no later than April 15, 2022.

Please give our office a call if you would like to discuss IRAs or need assistance with your retirement planning.

Many people dream of starting their own company, but if you’re one of the few who has turned their dream into reality, you know that it didn’t happen overnight. Making your business a success involved plenty of research, preparation, and hard work that you were happy to invest in. What few who are ready to move on realize is that selling requires almost the same amount of effort and planning.

Entrepreneurs intent on selling often want to move as quickly as possible: they may dread the emotional letdown and want to make a clean break, or they may be eager to move on to their next venture. Either way, the more preparation time you put in, the easier and more successful the process will be. Just as home sellers get a better price when they address maintenance issues and throw on a coat of paint before listing, your anticipatory activities will smooth the way for selling painlessly and profitably.

Where to start? You want to take a two-pronged approach, looking at what’s yours to make sure that you’re protected, and looking at the business as if you’re a potential buyer to ensure that everything is in order and is as appealing as possible. Here are our recommended steps:

• Stay Tuned In to the Business
  Once you’ve made the decision to sell your business, there’s a natural tendency to mentally check out. You need to guard against this, even as you focus on the steps you need to pursue to get the process started and look to your next venture. The success of your sale relies on the company operating at the top of its game, and if you’re distracted or have a loss of interest, that’s not going to happen. Put as much effort into the company’s success as you approach its last day as you did in its first days.
• Make Your Books — and Everything Else — Meticulous
  You may have all the numbers and figures in your head, but that’s no help to a potential buyer. They want – and need — to see the pertinent records, go over the books, and double-check to make sure that everything is running as swimmingly as you say it is. They also want to make sure no legal issues are lurking, or other surprise entanglements. Not only should you get caught up on your accounts, take the time to update all your other financials, get all equipment maintained, organize your inventory, and gather all pertinent paperwork into a clean package that you can present with pride. Doing so will paint a clear picture of your company as a good investment.
• Ensure that Trademarks and Copyrights in Place
  You’ve built a brand, but have you secured it? If you haven’t secured a copyright, patent, trademark, or whatever other protection is suitable for your business, your most valuable asset may end up in someone else’s hands. If you’ve been gliding along without the help of an attorney then it’s past due time to hire one – even if you’re about to walk away.
• Establish Your Exit Strategy
  Do you intend to just walk away once all the paperwork is signed, or do you want to continue to play a role in the business you created? There’s no right or wrong answer, but you need to figure it out before you start the sales process so you can present your plan as part of the package. Nothing will kill a deal faster than springing a previously unknown detail on a buyer whose plans don’t mesh with yours.

  Along the same lines, you need to consider what your post-ownership plan consists of. If you’ve already lined up a new gig that provides financial stability then you’re all set, but if not then your deal may need to include details of deferred payments, stock options, maybe even a consulting fee, or other paid position for a period of time. You also need to consider your tax liability from any gains you realize from the sale. If your company qualifies as a qualified small business you may be able to defer the federal tax on your capital gains.

• Take A Good Look from the Buyer’s Perspective
  Once you’ve taken all of the steps to prepare for a sale and protect yourself, take a final hard look at what you’re putting on the market. Just as you’d walk through your house and give it a once-over before you have an open house, you need to scrutinize the way the company’s assets look from a potential buyer’s perspective to see if there’s anything else you could have done to optimize or reveal its appeal.

In addition to each of these steps you can pursue on your own, it is worth considering bringing in an expert to help you with valuation and the sales process. Not only will they guide you through what can be a challenging process, but they will also ensure that you haven’t overlooked any important legal requirements.

Early in 2021 Congress passed the American Rescue Plan which included a provision that increased the child tax credit amount and upped the age limit of eligible children. Normally, the credit was $2,000 per eligible child under age 17. For the 2021 tax year the American Rescue Plan increased the credit to $3,000 for each child under age 18 and to $3,600 for children under age 6 at the end of the year.

Even though the benefit of a tax credit traditionally isn’t available until after the tax return for the year has been filed, for 2021 the new tax law included a provision to get the credit benefit into the hands of taxpayers as quickly as possible and charged the Secretary of the Treasury with establishing an advance payment plan. Under this mandate, those qualifying for the credit would receive monthly payments starting in July equal to 1⁄12 of the amount the IRS estimated the taxpayer would be entitled to by using the information on the 2020 return. If the 2020 return had not been filed or processed yet by the IRS, the 2019 information was to be used.

However, since the IRS only estimated the amount of the advance payments, some taxpayers may have received too much and others not enough. Thus, the payments received must be reconciled on the 2021 tax return with the amount that each taxpayer is actually entitled to. Those who received too much may be required to repay some portion of the advance credit while some may be entitled to an additional amount.

To provide taxpayers with the information needed to reconcile the payments, the IRS has begun sending out Letter 6419, an end-of-year statement that outlines the payments received as well as the number of qualifying children used by the IRS to determine the advance payments. For those who filed jointly on their prior year return, each spouse will receive a Letter 6419 showing the advance amount received.

Do not discard the letter(s) from the IRS as they will be required to properly file 2021 returns.

Having received the advance credit payment, taxpayers will find their refunds will be substantially less than they may have expected, or they might even end up owing money on their tax return unless their AGI is low enough to qualify for the safe harbor repayment protection for lower-income taxpayers, in which case the excess advance repayment is eliminated or reduced.

Example: If a taxpayer received advance child tax credit payments for two children based on the 2020 return, and the taxpayer doesn’t claim both children as dependents in 2021, the taxpayer would need to repay the excess on their return, unless they are protected by the safe harbor provision.

It is also possible that one taxpayer could have received the advance child tax credit payments based on their 2020 return and not have to make a repayment under the safe harbor rule, while another taxpayer, who can legitimately claim the child, can get the credit on their 2021 tax return. This is most likely to happen when the parents are divorced. So, there’s the potential for the child tax credit to be received by both parents.

Economic Impact Payment (EIP) Letter – The IRS will begin issuing Letter 6475, regarding the third Economic Impact Payment, to EIP recipients in late January. This letter will EIP recipients determine if they are entitled to and should claim the Recovery Rebate Credit on their tax year 2021 tax returns filed in 2022.

Letter 6475 only applies to the third round of Economic Impact Payments that were issued starting in March 2021 and continued through December 2021. The third round of EIPs, including the “plus-up” payments, were advance payments of the 2021 Recovery Rebate Credit that would be claimed on a 2021 tax return. Plus-up payments were additional payments the IRS sent to people who received a third EIP based on a 2019 tax return or information received from the Social Security Administration, Railroad Retirement Board or Dept. of Veterans Affairs; or to people who may be eligible for a larger amount based on their 2020 tax return.

Most eligible people already received the payments. However, those who are missing stimulus payments should review the information to determine their eligibility and whether they need to claim a Recovery Rebate Credit for tax year 2020 or 2021.

Like the advance CTC letter, the EIP letter includes important information that can help tax preparers quickly and accurately reconcile the Recovery Rebate Credit when preparing 2021 tax returns.

Please contact our office if you have questions regarding the Child Tax Credit or the Recovery Rebate Credit and the advance payments of either that you received.

The Tax Cuts and Jobs Act (TCJA) permanently eliminated deductions for most business-related entertainment expenses paid or incurred after 2017. For example, you can no longer deduct any of the cost of taking clients out for a round of golf, to the theater or for a football game. But the TCJA didn’t specifically address the meals, beverages and snacks that often accompany entertainment activities.

Then the Consolidated Appropriations Act (CAA), which was signed into at law in December of 2020, temporarily increased the deduction for certain business-related meal expenses.

If you’re like many business owners today, you may not be sure what you can deduct or how much you can deduct. Here’s what you need to know.

A 100% deduction

The CAA allows taxpayers to deduct 100% of the cost of business-related food and beverage expenses incurred at restaurants in 2021 and 2022. In previous years, deductions for business meals at restaurants were limited to only 50% of the cost.

Under the new law, for 2021 and 2022, business meals provided by restaurants are 100% deductible, subject to the considerations identified in preexisting IRS regulations. IRS guidance in Notice 2021-25, released in April, defines “restaurants” for the purpose of this tax break to  include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption.

However, restaurants don’t include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores. Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.

Pre-CAA regulations

In October 2020, the IRS issued final regulations which clarified that taxpayers could still deduct 50% of business-related meal expenses under the TCJA. These regs were written before the CAA change that allows 100% deductions for business-related restaurant meals provided in 2021 and 2022, but they still provide some useful guidance on the following issues:

Definition of food and beverage costs. Food or beverages means all food and beverage items, regardless of whether they are characterized as meals, snacks, or other types of food and beverages. Food or beverage costs mean the full cost of food or beverages, including any delivery fees, tips and sales tax.

Treatment of food and beverages provided with entertainment. For purposes of the general disallowance rule for entertainment expenses, the term “entertainment” includes food or beverages only if the food or beverages are provided at or during an entertainment activity (such as a sporting event) and the costs of the food or beverages aren’t separately stated.

Specifically, to be deductible, amounts paid for food and beverages provided at or during an entertainment activity must be:

• Purchased separately from the entertainment, or
• Stated separately on a bill, invoice or receipt that reflects the venue’s usual selling price for such items if they were purchased separately from the entertainment or the approximate reasonable value of the items.

Otherwise, the entire cost is treated as a nondeductible entertainment expense; the taxpayer can’t attempt to allocate costs between the entertainment and the food or beverages.

Treatment of business meals. Under the final regs, a deduction is allowed for business-related food or beverages only if:

• The expense isn’t lavish or extravagant under the circumstances,
• The taxpayer or an employee of the taxpayer is present at the furnishing of the food or beverages, and
• The food or beverages are provided to the taxpayer or a business associate.

A business associate means a person with whom the taxpayer could reasonably expect to engage or deal with in the active conduct of the taxpayer’s business such as a customer, client, supplier, employee, agent, partner or professional advisor — whether established or prospective.

Treatment of meals while traveling on business. Under the final regs, the long-standing rules for substantiating meal expenses still applies and they can be deductible.

The regs also reiterate the long-standing rule that no deductions are allowed for meal expenses incurred for spouses, dependents or other individuals accompanying the taxpayer on business travel (or accompanying an officer or employee of the taxpayer on business travel), unless the expenses would otherwise be deductible by the spouse, dependent or other individual. For example, meal expenses for the taxpayer’s spouse would be deductible if the spouse works in the taxpayer’s unincorporated business and accompanies the taxpayer for business reasons.

Under the new law, for 2021 and 2022, meals provided by restaurants while traveling on business are 100% deductible, subject to the preceding considerations.

Need help?

There are additional circumstances under which your business can deduct 100% of the cost of meals, other food and beverages. Contact your tax advisor if you have questions or want more information.

© 2021