Beware Of New Tax Rule Affecting People Who Use Venmo, Paypal Or Other Payment Apps

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Beware Of New Tax Rule Affecting People Who Use Venmo, Paypal Or Other Payment Apps

Why Tax Planning Is More Important If You Earn Income From The Gig Economy.

From renting spare rooms and vacation homes to car rides or using a bike…name a service or a craft & handmade item marketplace and it’s probably available through the gig economy which is proliferating through many digital platforms like Uber, Lyft, Doordash, Postmates, Instacart and Airbnb.

And if you use payment apps like PayPal, Venmo, Square, and other third-party electronic payment networks to pay for goods and services, you should be aware of a tax reporting change that goes into effect in January 2022.

Starting with the 2022 calendar year, payment app providers will have to start reporting to the IRS a user’s business transactions if, in aggregate, they total $600 or more for the year. The reporting form to use is a Form 1099-K.  A business transaction is defined as payment for a good or service.

Prior to this change, app providers only had to send the IRS a Form 1099-K if an individual account had at least 200 business transactions in a year and if those transactions combined resulted in gross payments of at least $20,000.

The expansion of the reporting rule is the result of a provision in the American Rescue Plan, which was signed into law earlier this year. The IRS will be able to use this information to uncover unreported income and recover lost tax revenues.

Federal Government’s Independent Contractor Ruling

The U.S. Department of Labor on January 6, 2021 announced a final rule to define whether workers are employees or independent contractors making it easier for companies to classify workers as independent contractors.

The change bases worker classification on an “economic reality test” focused primarily on whether a worker is economically dependent on an employer. Under the test, individuals are classified as employees if they are economically dependent on the employer; but if an individual is in business for themselves and not economically dependent on someone else’s business, that individual should be classified as an independent contractor.

Independent contractors are not entitled to benefits for companies they render work for and independent contractors are responsible to pay self-employment taxes on their income.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

  1. The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;
  2. The work performed is outside the usual course of the employer’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

  • Translators, appraisers, home inspectors and registered foresters.
  • For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
  • For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

Four tips you should know about how the gig economy might affect your taxes:

 1.  The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

2.  Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 56 cents per mile for 2021. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

3.  You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

4.  Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and January 15 (of the next year). Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

As the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For. 

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

Tax Planning In The Era Of COVID-19 – What You Need To Know About Business Meals And Advertising And Marketing Costs

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Tax Planning In The Era Of COVID-19 – What You Need To Know About Business Meals And Advertising And Marketing Costs

The Consolidated Appropriations Act, 2021, Pub. L. No. 116- 260, 134 Stat. 1182 (December 27, 2020) amended §274 of the Internal Revenue Code (Code) providing a temporary 100-percent deduction for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant.

On April 8, 2021 the IRS released Notice 2021-25 which provides guidance regarding the temporary 100-percent deduction for expenses that are paid or incurred in 2021 and 2022, for food or beverages provided by a restaurant.  In particular, the notice explains when the temporary 100-percent deduction applies and when the 50-percent limitation continues to apply for purposes of § 274 of the Internal Revenue Code.

Historical Treatment Of Deductions Relating to Meal And Entertainment Expenses

Under prior law, a taxpayer generally can deduct business-related meal and entertainment expenses paid or incurred in entertaining a client, customer, or employee. The taxpayer had to show that the item was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.  In such case, a deduction is allowed, although it is generally limited to 50% of the expense amount.

Starting with 2018 more stringent rules apply with respect to a deduction for meal and entertainment expenses paid after 2017.  The Tax Cuts And Jobs Act Of 2017 (“TCJA”) TCJA signed into law by President Trump on December 22, 2017, repeals the deduction for most entertainment expenses, effective for amounts incurred after 2017. There was no exception for amount incurred that are directly related to, or associated with, the active conduct of the taxpayer’s trade or business. This repeal would extend to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.

However, it is still possible that some amounts may still be deductible if they meet the exceptions in IRC § 274(e), a provision that was not touched by the TCJA.

The main exceptions in IRC § 274(e) allowing deductibility are:

  1. Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for the taxpayer’s employees.
  2. Expenses for recreational, social, or similar activities (and facilities used in connection therewith) primarily for the benefit of employees, other than highly-compensated employees.
  3. Expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors.
  4. Expenses directly related and necessary to attendance at a business meeting or convention of any certain organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade.
  5. Expenses for goods, services and facilities made available by the taxpayer to the general public.

This lack of clarity by the TCJA created a lot of confusion in the business community which the IRS was looking to address.

IRS Guidance Issued 2018

On October 3, 2018 the IRS issued guidance, Notice 2018-76, clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction by the TCJA.    Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.

Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense under IRC § 162(a) paid or incurred during the tax year when carrying on any trade or business;
  2. The expense is not lavish or extravagant under the circumstances;
  3. The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
  4. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  5. For food and beverages provided during or at an entertainment activity, they 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 interim guidance includes three examples illustrating how the IRS would apply these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the event.

Living In The Era Of COVID-19 – Impact Of New Law And New Guidance

Most taxpayers consider business meals to be part of entertainment and promotion which is an area that IRS targets in examinations of income tax returns as the IRS believes that there is abuse of this provision and/or a higher level of errors made by taxpayers in trying the comply with the law’s limitations.  So the issuance by IRS of Notice 2021-25 is extremely timely.

To summarize –

  1. The 100% deduction of business meals is available when the business meal from a restaurant. The term “restaurant” means a business that prepares and sells food or beverages to retail customers for immediate consumption, regardless of whether the food or beverages are consumed on the business’s premises. However, a restaurant does not include a business that primarily sells pre-packaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine, or liquor store; drug store; convenience store; newsstand; or a vending machine or kiosk.  In addition, an employer may not treat as a restaurant for purposes of this provision: (a) any eating facility located on the business premises of the employer and used in furnishing meals excluded from an employee’s gross income, or (b) any employer-operated eating facility treated as a de minimis fringe even if such eating facility is operated by a third party under contract with the employer as described. Additionally, the 5 points listed above would still apply.
  2. Ineligible business meals described above should still qualify to be 50% deductible but again the 5 points listed above would still apply.

In all cases, only the food and beverage portion are deductible.  Entertainment continues to be non-deductible.  The 100% deduction enhancement that started January 1, 2021 expires January 1, 2023.

Advertising And Marketing Costs

The tax law allows businesses to deduct expenses that help them bring in new customers and keep existing ones. These costs may include expenses for advertising and marketing. Here are some details about this valuable tax deduction that can help small businesses save money on their taxes.

Advertising and marketing costs must be ordinary and necessary to be tax deductible.

  • An ordinary expense is one that is common and accepted in the industry.
  • A necessary expense is one that is helpful and appropriate for the trade or business. An expense does not have to be indispensable to be considered necessary.

Here are a few advertising expenses that are usually deductible:

  • Reasonable advertising expenses that are directly related to the business activities.
  • An expense for the cost of institutional or goodwill advertising to keep the business name before the public if it relates to a reasonable expectation to gain business in the future.  An example provided by IRS is the cost of advertising that encourages people to contribute to the Red Cross or to participate in similar causes is usually deductible.
  • The cost of providing meals, entertainment, or recreational facilities to the public as a means of advertising or promoting goodwill in the community.

Generally, small businesses cannot deduct amounts they pay to influence legislation, which includes advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate.

What Should You Do?

Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS. Also, be mindful that in any audit by IRS, an agent will be making sure that taxpayers are not inflating the amount charged for food and beverages in order to circumvent the disallowance of entertainment.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out Cannabis Tax Attorney.  Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

Tax return filing Cannabis

Advantages To Filing A 2020 Tax Return – Getting Money Due To You

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Advantages To Filing A 2020 Tax Return – Getting Money Due To You

Most people with gross income of $12,400 or more must file a federal tax return. Some people with a lower income are not required to file. However, these individuals should still consider filing for a refund of federal income tax withheld. They may also be eligible for certain tax credits, like the earned income tax credit, the recovery rebate credit and others.

Generally, the 2020 Federal individual income tax return was due May 17, 2021; however, if you timely filed an extension no later than May 17th, your filing deadline is now October 15, 2021 (although certain taxpayers who filed an extension and are victims of Hurricane Ida may now have until January 3, 2022).

Here are five things to consider when determining whether to file a 2020 tax return, including possibly being eligible for an Economic Impact Payment:

  1. Tax withheld or paid–
  • Did your employer withhold federal income tax from your pay in 2020?
  • Did you make estimated tax payments?
  • Did you get a refund last year, and have it applied to your 2020 tax?

If you answered “yes” to any of these questions, you may be owed a refund. To receive the refund, you must file a 2020 tax return.

  1. Earned income tax credit– This is a tax credit for low- to moderate-income wage earners. It is a refundable tax credit, and the amount depends on the taxpayer’s income and number of children. The credit doesn’t just reduce the amount of tax owed but could also result in a refund. However, once again, to claim the EITC, you must file a return.
  1. Child tax credit– Taxpayers can claim this credit if they have a qualifying child under the age of 17 and meet other qualifications. The maximum amount per qualifying child is $2,000. Up to $1,400 of that amount can be refundable for each qualifying child. So, like the EITC, the Child Tax Credit can give a taxpayer a refund even if they owe no tax.

Taxpayers with dependents who don’t qualify for the child tax credit may be able to claim the credit for other dependents. The maximum credit amount is $500 for each dependent who meets certain conditions.

  1. American opportunity or lifetime earning credits – Two credits can help taxpayers paying higher education costs for themselves, a spouse or dependent. Even if the taxpayer doesn’t owe any taxes, they may still qualify. You need to complete Form 8863, Education Credits and file it with the tax return.

If you do not qualify for the either of these credits, you may benefit from taking the Tuition and Fees Deduction on your tax return.

  1. Economic Impact Payment– Anyone who is eligible for an Economic Impact Payment but did not get the payments or did not get the full amount, must file a tax return to claim the recovery rebate credit even if they aren’t normally required to file.  The maximum Economic Impact Payments for qualifying individuals were:
  • $1,200 per person and $500 per qualifying child for the first payment
  • $600 per person and $600 per qualifying child for the second payment

Pandemic-related tax topics

  • Unemployment benefits are taxable. Watch your mail for a Form 1099-G. In some states, taxpayers may be able to get their Form 1099-G from the website where they signed up for benefits.
  • There’s a new rule to help people who lost their job or had a change in income in 2020. Filers can use their 2019 earned income to figure their earned income tax credit, if their 2019 earned income was more than their 2020 earned income. This new rule also applies to the additional child tax credit.

An Opportunity For Taxpayers Who Owe The IRS

Do not think that if you owe the IRS your tax problem will disappear because of the measures being considered by the government. Instead you should be utilizing this valuable time to get yourself prepared so that when activity in this nation regains momentum, you are ready to make the best offer or proposal to take control of your outstanding tax debts.

As a prerequisite to any proposal to the IRS, you must be in current compliance. That means if you have any outstanding income tax returns, they must be completed and submitted to IRS.

Also, if you are required to make estimated tax payments, you must be current in making those payments. Fortunately, as we are now in 2021, taxpayers who expect to owe for 2020 should have their 2020 income tax returns done now so that the 2020 liability can be rolled over into any proposal and the requirement to make estimated tax payments will now start for 2021.

Remember that COVID-19 does not alter the tax laws, so all taxpayers should continue to meet their tax obligations as normal. Individuals and businesses should keep filing their tax returns and making payments and deposits with the IRS, as they are required to do.

Even though the IRS may be operating slower due to COVID-19, the IRS will continue to take steps where necessary to protect all applicable statutes of limitations. In instances where statute expirations might be jeopardized and a taxpayer is not agreeing to extend such statute, the IRS will issue Notices of Deficiency and pursue other similar actions to protect the interests of the government in preserving such statute.

The take away from this – use the Federal government’s downtime and continued uncertainty with COVID-19 to your advantage to prepare for the future.

What Should You Do?

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Outer Space Taxation – Expanding the power of IRS to tax beyond our planet.

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Outer Space Taxation – Expanding the power of IRS to tax beyond our planet.

Planning to go on one of the next flights to space?  You may find an extra charge on your bill to the IRS.

In a press release issued on July 20, 2021 by U.S. Rep Earl Blumenauer (D-OR), a senior member of the Ways and Means Committee, he announced plans for a new space tax.  Already the U.S. tax code taxes U.S. taxpayers on worldwide income.  Now under the proposed Securing Protections Against Carbon Emissions (SPACE) Tax Act, a new excise tax would be imposed on commercial space flights carrying human passengers for purposes other than scientific research (so called “space tourism trips”).

“Space exploration isn’t a tax-free holiday for the wealthy. Just as normal Americans pay taxes when they buy airline tickets, billionaires who fly into space to produce nothing of scientific value should do the same, and then some,” said Blumenauer. “I’m not opposed to this type of space innovation. However, things that are done purely for tourism or entertainment, and that don’t have a scientific purpose, should in turn support the public good.”

While proponents of suborbital space flights point to transatlantic flights as having similar carbon footprints, these flights carry significantly more passengers and travel much farther. The result is space launches accounting for an estimated 60-times greater emissions than transatlantic flights on a per-passenger basis, enough to drive a car around the earth and more than twice the carbon budget recommended in the Paris Climate Agreement.

Researchers are also actively exploring the impact of space launches on accelerating the depletion of stratospheric ozone, which is orders of magnitude greater for rocket engines using alumina-producing solid rocket fuel or black soot-producing kerosene.

Blumenauer envisions the SPACE Tax Act to include a per-passenger tax on the price of a commercial flight to space, like that for commercial aviation.  That’s right in case you have not noticed the IRS imposes an excise tax on traditional airline trips and excise taxes are nothing new to IRS.

You will find excise taxes in many goods and services that are sold including fuel, tires, cigarettes and so much more.  They typically are not separately stated like when you see sales taxes on your receipt so that is why excise taxes are typically referred to as a “hidden tax”.

Getting back to the proposed excise tax on space flights, it would also include a two-tiered excise tax for each launch into space. The first tier would apply to suborbital flights exceeding 50 miles above the Earth’s surface but not exceeding 80 miles above the Earth’s surface. The second tier, which would levy a significantly higher excise tax, would apply for orbital flights exceeding 80 miles above the Earth’s surface.

Exemptions would be made available for NASA spaceflights for scientific research purposes. In the case of flights where some passengers are working on behalf of NASA for scientific research purposes and others are not, the launch excise tax shall be the pro rata share of the non-NASA researchers.

Given that Virgin Galactic’s most recently stated ticket price was $250,000, whatever excise tax rate that could ultimately be imposed would make a nice “line item” payment to the IRS.  According to a table of U.S. Government-Imposed Taxes On Air Transportation published by the organization Airlines For America, domestic passenger air travel excluding flight segments is subject to an excise tax rate of 7.5% in 2021.

What Should You Do?

Tax planning is not just for the ultra-wealthy who can afford space flight.  You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out Cannabis Tax Attorney.  Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

 

Including A Tax Plan With Your Summer 2021 Wedding Plan

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Including A Tax Plan With Your Summer 2021 Wedding Plan

With all the planning and preparation that goes into a wedding, taxes may not be high on your summer wedding checklist but along with the cake and gift registry, the first tax return as a married couple should be included on your checklist.

Here are some simple steps that can make filing your first tax return as newlyweds less stressful:

  • Name change. The names and Social Security numbers on your tax return must match your Social Security Administration records. If you change your name, report it to the SSA. To do that, file Form SS-5, Application for a Social Security Card. You can get the form on SSA.gov, by calling 800-772-1213 or from your local SSA office.
  • Change tax withholding. A change in your marital status means you must give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. If you and your spouse both work, your combined incomes may move you into a higher tax bracket or you may be affected by the Additional Medicare Tax. Use the IRS Withholding Calculator tool at IRS.gov to help you complete a new Form W-4.
  • Changes in circumstances. If you or your spouse purchased a Health Insurance Marketplace plan and receive advance payments of the premium tax credit in 2021, it is important that you report changes in circumstances, such as changes in your income or family size, to your Health Insurance Marketplace when they happen. You should also notify the Marketplace when you move out of the area covered by your current Marketplace plan. Advance credit payments are paid directly to your insurance company on your behalf to lower the out-of-pocket cost you pay for your health insurance premiums. Reporting changes now will help you get the proper type and amount of financial assistance so you can avoid getting too much or too little in advance, which may affect your refund or balance due when you file your tax return.
  • Address change. Let the IRS know if your address changes. To do that, send the IRS Form 8822, Change of Address. You should also notify the U.S. Postal Service. You can ask them online at USPS.com to forward your mail. You may also report the change at your local post office. You should also notify your Health Insurance Marketplace when you move out of the area covered by your current health care plan.
  • Tax filing status. If you’re married as of December 31, that’s your marital status for the whole year for tax purposes. You and your spouse can choose to file your federal income tax return either jointly or separately each year. While filing jointly is usually more beneficial, it’s best to figure the tax both ways to find out which status results in the lowest tax.
  • Update estate plan documents. Now that your circumstances are changing, it is prudent to have your Will, Powers Of Attorney and Living Will updated. You should also consider if you do not have one already, setting up a Revocable Trust.  Likewise, if you already have a Trust, that should be updated too.

Can you get a Tax Write-Off for your wedding?

Generally you cannot write-off a wedding but there are ways that newlyweds can spend for their weeding that can actually save money when it’s time to pay taxes at the end of the year.

While tax write-offs are usually the last thing a bride and groom think about when planning a wedding, when it comes to saving taxes you may want to consider these tips:

The Attire. Brides often wear their wedding dress only once. And while some opt to keep them for whatever reason, others have no idea how to discard them. For a tax write-off, consider donating the wedding gown to a nonprofit organization like Goodwill, MakingMemories.org or CinderellaProject.net. These organizations will take your dress and issue you a donation receipt for your good efforts. While you’re at it, consider donating the bridesmaids dresses, flower girl dress, ring bearer’s outfit and any nonperishable decorations.

The Venue. Believe it or not, some wedding venues are tax deductible. Choose a ceremony or reception venue located at a museum, public-owned park or even a historic house or building of some sort. These places are usually owned by nonprofit organizations who use the money they receive for upkeep purposes only. Speak with the head of the venue sight to make sure that it is a nonprofit organization and what portion of the cost you pay is in excess of the deemed value of the rental of the space (only the excess amount could be deductible as a charitable contribution).

Wedding Favors and Gifts. Charity donations can make thoughtful wedding gifts and favors. They also save you money during tax season. So instead of purchasing a trinket that your guests or attendants may discard later, opt for a donation to your favorite charity on behalf of all those who are a part of your wedding.

Wedding Flowers and Foods. You can also get a tax write-off for items that have a short life, such as leftover food and all those floral centerpieces. After the wedding is over, ask a friend or family member to bring the items to a local nursing home, homeless shelter or somewhere similar. You will get a tax deduction for the cost of the remaining food and flowers and you’ll put a few smiles on faces.

Documenting. Whether you have your taxes done by a professional accountant or take care of them yourself, it’s important to document each of these wedding tax write-offs. Keep all your receipts for any purchases you make and request a donation sheet (signed by the organization) that states how much you donated, what you donated and when. Save all your contracts for any wedding venues and, if possible, request that the venue organizer provide you with receipts for each of your payments.

Reporting Charitable Contributions. To claim charitable deductions, you must itemize them on Schedule A of Form 1040. The IRS will need any and all receipts and statements that support the fees, expenses and donations that you claim. If your total noncash contributions exceed $500, you must also fill out Form 8283, Noncash Charitable Contributions, and attach it to your tax return. If you donate a single item worth more than $5,000, you must add Form 8283, Section B, and obtain an appraisal.

It’s risky business to take a tax write-off for your wedding but if it is done right it should be respected by the IRS.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. And if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

Max The Vax But Don’t Forget The Tax

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Max The Vax But Don’t Forget The Tax

States offering prizes to incentivize people to get the COVID-19 vaccine.

In California – get vaccinated, get rewarded. Are you already vaccinated or about to be? Great! You’ll have a chance at winning $50,000 or a grand prize of $1.5 million!  Not yet vaccinated against COVID-19? Listen up! Get vaccinated as soon as possible to be eligible for a $50 incentive card and other cash prizes.

Ten winners will be selected by the California Department Of Public Health (“CDPH”) on June 15, 2021 to receive $1.5 million each — prizes totaling $15 million! All Californians who have had at least one COVID-19 dose will automatically be entered.

You’re eligible to win $1.5 million if you:

  • Live in California,
  • Are aged 12 and older, and
  • Have received at least a first dose of your COVID-19 vaccine.

Prize money will be paid after the winner has completed their vaccination series. Incarcerated persons and persons living outside of California are not eligible. Click here for terms and conditions.

Taxability of Prizes

IRC Sec. 74(a) requires the inclusion in gross income of all amounts received as prizes and awards.  Prizes and awards that are generally includible in gross income include (but are not limited to): (1) amounts received from radio and television giveaway shows; (2) door prizes; and (3) awards in contests of all types.  If the prize or award consists of goods or services rather than money, the fair market value of the goods or services is the amount includible in gross income (Reg. Sec. 1.74-1(a)(2)).

Considering the foregoing CDPH requires prize winners giving consent to disclose the winner’s information from CDPH’s vaccine registry for purposes including, but not limited to, payment and tax withholding.  Also, winnings are subject to any public debts of the winner of which the State is aware (e.g., taxes, child support, restitution payments).

What Should You Do?

If you are lucky enough to win, keep in mind that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Francisco Bay Area (including San Jose and Walnut Creek) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out Cannabis Tax Attorney.  Also, if you are involved in crypto currency, check out what a Bitcoin tax attorney can do for you.

Federal & California Governments Making It Easier For Taxpayers In The Gig Economy To Be Treated As Independent Contractors.

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Federal & California Governments Making It Easier For Taxpayers In The Gig Economy To Be Treated As Independent Contractors.

Why Tax Planning Is More Important If You Earn Income From The Gig Economy.

From renting spare rooms and vacation homes to car rides or using a bike…name a service or a craft & handmade item marketplace and it’s probably available through the gig economy which is proliferating through many digital platforms like Uber, Lyft, Doordash, Postmates, Instacart and Airbnb.

Trump administration finalizes independent contractor rule

The U.S. Department of Labor on January 6, 2021 announced a final rule to define whether workers are employees or independent contractors making it easier for companies to classify workers as independent contractors.

The change bases worker classification on an “economic reality test” focused primarily on whether a worker is economically dependent on an employer. Under the test, individuals are classified as employees if they are economically dependent on the employer; but if an individual is in business for themselves and not economically dependent on someone else’s business, that individual should be classified as an independent contractor.

Independent contractors are not entitled to benefits for companies they render work for and independent contractors are responsible to pay self-employment taxes on their income.

California law updated in 2020 to expand independent contractor status

California Assembly Bill (“AB”) 5 codified the California Supreme Court holding in Dynamex Operations West, Inc. v. Superior Court and adopted the “ABC” test to determine whether independent contractors should be treated as employees with various exceptions.  Effective January 1, 2020 under the “ABC” test, workers are presumed to be employees unless they satisfy three conditions:

  1. The worker is free from the employer’s control and direction in connection with the work performed, both under the contract and in fact;
  2. The work performed is outside the usual course of the employer’s business; and
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.

Under AB 5, certain occupations were excluded from the ABC test, including doctors, lawyers, dentists, licensed insurance agents, accountants, architects and engineers, private investigators, real estate agents, and hairstylists.

Since the enactment of AB 5, the California Legislature introduced subsequent legislation (AB 257) to allow more workers to be treated as independent contractors by increasing the availability of exemptions to the ABC test as follows:

  • Translators, appraisers, home inspectors and registered foresters.
  • For the entertainment industry to include recording artists, songwriters, lyricists, composers, proofers, managers of recording artists, record producers and directors, musical engineers, musicians, vocalists, music album photographers, independent radio promoters, and certain publicists.
  • For referral agencies to include consulting, youth sports coaching, caddying, wedding and event planning, and interpreting services.

Lastly, in November 2020, California voters passed Proposition 22 which allows workers in the gig economy that serve as app-based drivers to be treated as independent contractors.

Four tips you should know about how the gig economy might affect your taxes:

  1. The activity is taxable.

If you receive income from a sharing economy activity, it’s generally taxable even if you don’t receive a Form 1099-MISC, Miscellaneous Income, Form 1099-K, Payment Card and Third Party Network Transactions, Form W-2, Wage and Tax Statement, or some other income statement. This is true even if you do it as a side job or just as a part time business and even if you are paid in cash and to minimize how much you need to pay in taxes, it is imperative that you keep track of your business expenses.

  1. Some expenses are deductible.

The tax code allows you to deduct certain costs of doing business from gross income. For example, a taxpayer who uses their car for business may qualify to claim the standard mileage rate, which is 56 cents per mile for 2021. Generally, you cannot deduct personal, living or family expenses. You can deduct the business part only, such as supplies, cell phones, auto expenses, food and drinks for passengers, car washes, parking fees, tolls, roadside assistance plans, taxes, and incentives associated with certain electric and hybrid vehicles.

Example: You used your car only for personal purposes during the first 6 months of the year. During the last 6 months of the year, you drove the car a total of 15,000 miles of which 12,000 miles were driven to provide transportation services through a company that provides such services through requests to its app. This gives you a business use percentage of 80% (12,000 ÷ 15,000) for that period. Your business use for the year is 40% (80% × 6/12).

Example: You use your car both for personal purposes and to provide transportation arranged through a company that provides transportation service through its app. You must divide your personal and business expenses based on actual mileage. You can deduct the business part of these actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Depending on the facts and circumstances, you may be providing the services either in a self-employed capacity or as an employee. If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate.

  1. You Could Be Subject To Self Employment Tax

The net income from your service-related activity with the sharing economy facilitator is subject to Self-Employment taxes, (Social Security and Medicare), at a 15.3% rate.  Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.

So whether you are using your personal car for business or part of your residence as a home office, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will lose out on a lot of deductions and pay a lot more in taxes.

  1. Beware Of Requirement To Make Estimated Tax Payments.

Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”.  As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings.  The U.S. tax system is pay-as-you-go. This means that taxpayers involved in the sharing economy often need to make estimated tax payments during the year. These payments are due on April 15, June 15, September 15 and January 15 (of the next year). Taxpayers use Form 1040-ES to figure these payments.

Why The IRS Likes The Gig Economy.

Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, gig economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.

What Should You Do?

As the gig economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners. That is why it’s important to keep good records. Choose a recordkeeping system suited to your business that clearly shows your income and expenses. The business you’re in affects the type of records you need to keep for federal tax purposes. Your recordkeeping system should include a summary of your business transactions. Your records must also show your gross income, as well as your deductions and credits. Federal law sets statutes of limitations that can affect how long you need to keep tax records.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), San Diego County (Carlsbad) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Additionally, if you are involved in cannabis, check out what a cannabis tax attorney can do for you.  And if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

5 Moves To Make Before Year End That Can Save You A Lot of Money on Your 2020 Taxes

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5 Moves To Make Before Year End That Can Save You A Lot of Money on Your 2020 Taxes

On December 22, 2017, President Trump signed into law the 2017 Tax Cuts And Jobs Act. It’s been a good 30 years since the last time the Internal Revenue Code received such a major update.

Major Changes From The New Law Include:

Compressed And Lower Income Tax Rates For Individuals.

Increased Standard Deduction For Individuals

Elimination Of Personal Exemptions

Limitations of Deductibility Of Itemized Deductions including Mortgage Interest and State & Local Taxes.

Lower Corporation Tax Rates.

The Big Picture:

With many itemized deductions having disappeared by the 2017 Tax Cuts And Jobs Act and the higher standard deduction, less taxpayers will be itemizing deductions in 2020 but there is still significant tax planning you can do.  Under these circumstances the key here is to accelerate deductions in 2020 and defer income into 2021.

Following are five year-end tax moves to make before this New Year’s Day:

  1. Give more to charity in 2020.

In addition to the usual dollar donations to charities, religious institutions and educational institutions, consider clearing your home of those unwanted household goods and clothing to give to charities. Many groups will accept these items even vehicles, with some even making arrangements to pick up them up from your home. You may also consider to donate stock or mutual funds that you’ve held for more than a year but that no longer fit your investment goals. The charity gets the asset to hold or sell, and your portfolio re-balancing nets you a deduction for the asset’s value at the time of gifting. Even better, you do not have to worry about capital gains taxes on the appreciation of your gift. Remember that if you take the standard deduction in 2020, you won’t get any tax savings from your charitable contributions made in 2020.

  1. Make the most of your home – mortgage interest.

Home-ownership provides a variety of tax breaks, some of which you can use by year-end to reduce your current year’s tax bill. Make your January mortgage payment by December 31st and deduct the mortgage interest on your 2020 tax return.

  1. Make the most of your home – property taxes.

Like prepaying mortgage interest, the same tactic will apply for property taxes; however, keep in mind that property taxes along with other state and local taxes will be deductible only up to $10,000.

  1. Pay your self-employed business expenses

If you are self-employed, you should accelerate payment of your business expenses in 2020. Recognizing these expenses in 2020 will provide you with a tax savings for 2020.

  1. Defer your income into 2021.

If you are a small business owner, consider delaying income until January 2021. So if you are chasing up some customers or clients to pay the bill you sent them a while ago, you might want to wait until January to get aggressive on collecting. Consider delaying the delivery of invoices for year-end jobs until January 2021.  Small business owners should make sure they are benefiting from the deduction of 20% of their business income. If you are an employee, ask your boss to hold your bonus until January. Individuals should also consider putting more money into a tax-deferred workplace retirement plan in 2020 and hold off on selling assets that will produce a capital gain until 2021.

What Should You Do?

With not much time left in 2020 you will need to act quickly on those tax moves that are easy to accomplish to reduce your tax bill.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income. Also, if you are involved in cannabis, check out what our cannabis tax attorney can do for you. Additionally, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

How To Handle Losses Due to Theft To Reduce California Cannabis Taxes and Sales & Use Tax

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With the recent wave of break-ins and robberies to local dispensaries in particular, cannabis business should not overlook this opportunity to save taxes.

Cannabis Excise Tax for Cannabis Retailers

As a cannabis retailer, you are required to pay the cannabis excise tax (15%) to your distributor based on the average market price of the cannabis or the cannabis products sold or transferred to you. However, if you already paid the cannabis excise tax to your distributor and the associated cannabis or cannabis products were subsequently stolen from you, you may request a refund of the tax from your distributor, and provide your distributor with documentation substantiating the theft. Examples of documentation include, but are not limited to, police reports, insurance claims, etc. (see additional information below). When a refund is issued to you, your distributor is required to provide you with a receipt that indicates the amount of cannabis excise tax refunded.

Cannabis Excise Tax for Distributors

As a distributor, you are required to collect the cannabis excise tax from cannabis retailers that you supply with cannabis or cannabis products. The cannabis excise tax does not apply to cannabis or cannabis products that you sell or transfer to a cannabis retailer that is subsequently stolen from the retailer. When a theft of cannabis or cannabis products from a retailer occurs, and the cannabis excise tax was already paid to you, the retailer can request a refund from you for the cannabis excise tax paid to you. For your records, and for any claim for refund you may file, you should obtain documentation from the cannabis retailer that supports the theft. You are required to provide the cannabis retailer with a receipt or similar documentation that indicates the amount of the cannabis excise tax returned to the retailer.

For cannabis excise tax that you already reported and paid to the California Department of Tax and Fee Administration (CDTFA), and subsequently returned to the cannabis retailer due to theft, you may report the amount returned on your next cannabis tax return, on the line labeled “Less excess excise tax collected, if any”. Alternatively, you may submit a CDTFA-101, Claim for Refund, for the excess cannabis excise tax you paid to the CDTFA and later returned to the cannabis retailer. You will need to provide the supporting documentation of the loss that the retailer provided to you.

Cultivation Tax for Distributors

The cultivation tax is due on cannabis that enters the commercial market (that is, it passes the required testing and quality assurance review) even if the cannabis is subsequently lost due to theft. However, the cultivation tax is not due on cannabis stolen before the cannabis entered the commercial market. If you collected the cultivation tax on cannabis that never entered the commercial market, you are required to return the cultivation tax to the originating cultivator. If the cultivation tax cannot be returned to the cultivator, you must report and pay the cultivation tax to the CDTFA.

Sales and Use Tax

You are required to pay sales tax on all taxable sales despite the theft of cash. Losses of merchandise due to theft are not deductible for sales and use tax purposes (as no sale occurred). However, since the loss of merchandise from theft may affect your cost of goods sold, you should maintain documentation in case of an audit.

Documentation

Proper documentation must be kept to support any losses due to theft. Acceptable forms of documentation for sales and use tax, cannabis excise tax, and cultivation tax may include police reports, insurance claims, and/or reports from private investigating agencies. Cannabis inventory losses should be recorded in the California Cannabis Track-and-Trace (CCTT) system.

No Relief For Losses Due To Theft Of Cash

Although the CDTFA is allowing for reimbursements to Distributors for refunds to retailers and operators related to stolen cannabis products, the CDTFA has specifically stated that there is no exemption or deduction of the cannabis excise tax for the loss of proceeds due to theft of cash.  Arguably, under certain circumstances such theft loss should still be available to take for Federal & State income taxes.

What Should You Do?

Start your marijuana business on the right track.  Protect yourself and your investment by engaging the cannabis tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County and other California locations. We can come up with tax solutions and strategies and protect you and your business and to maximize your net profits. Also, if you are involved in crypto currency, check out what a bitcoin tax attorney can do for you.

 

Proposed Treasury Regulations Issued On Deducting Business Meals

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Proposed Treasury Regulations Issued On Deducting Business Meals

The Tax Cuts And Jobs Act Of 2017 (“TCJA”) was signed into law by President Trump on December 22, 2017.  It has been a good 30 years since the last time the Internal Revenue Code received such a major update but for taxpayers.

Deductions Relating to Meal And Entertainment Expenses

Under prior law, a taxpayer generally can deduct business-related meal and entertainment expenses paid or incurred in entertaining a client, customer, or employee. The taxpayer had to show that the item was directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business.  In such case, a deduction is allowed, although it is generally limited to 50% of the expense amount.

Starting with 2018 more stringent rules apply with respect to a deduction for meal and entertainment expenses paid after 2017.  The TCJA repeals the deduction for most entertainment expenses, effective for amounts incurred after 2017. There is no exception for amount incurred that are directly related to, or associated with, the active conduct of the taxpayer’s trade or business. This repeal would extend to the cost of tickets to sporting events, stadium license fees, private boxes at sporting events, theater tickets, golf club dues, etc.

However, it is still possible that some amounts may still be deductible if they meet the exceptions in IRC § 274(e), a provision that was not touched by the TCJA.

The main exceptions in IRC § 274(e) allowing deductibility are:

  1. Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for the taxpayer’s employees.
  2. Expenses for recreational, social, or similar activities (and facilities used in connection therewith) primarily for the benefit of employees, other than highly-compensated employees.
  3. Expenses incurred by a taxpayer which are directly related to business meetings of the taxpayer’s employees, stockholders, agents, or directors.
  4. Expenses directly related and necessary to attendance at a business meeting or convention of any certain organizations such as business leagues, chambers of commerce, real estate boards, and boards of trade.
  5. Expenses for goods, services and facilities made available by the taxpayer to the general public.

This lack of clarity by the TCJA created a lot of confusion in the business community which the IRS was looking to address.

Proposed Regulations

On October 3, 2018 the IRS issued guidance, Notice 2018-76, clarifying that taxpayers may generally continue to deduct 50% of the food and beverage expenses associated with operating their trade or business, despite changes to the meal and entertainment expense deduction by the TCJA.    Now that the IRS issued Proposed Regulations, here is what you need to know.

Under the proposed regulations, taxpayers may deduct 50% of an otherwise allowable business meal expense if:

  1. The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
  1. The expense is not lavish or extravagant under the circumstances;
  1. The taxpayer or an employee of the taxpayer is present when the food and beverages are furnished;
  1. The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
  1. For food and beverages provided during or at an entertainment activity, they 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.

Regarding the requirement in No. 4 above that the food and beverages be provided to a current or potential business contact, the IRS defines such a contact as “a person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.”

What Should You Do?

Like with any expense you are looking to deduct it is important to make sure that the tax law would support a deduction and that you have the required backup documentation in case you are audited by the IRS. Also, be mindful that in any audit by IRS, an agent will be making sure that taxpayers are not inflating the amount charged for food and beverages in order to circumvent the disallowance of entertainment.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County (Irvine), Los Angeles County (Long Beach) and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.  Additionally, if you are involved in the cannabis industry, check out what a Cannabis Tax Attorney can do for you; and if you are involved in crypto currency, check out what a Bitcoin Tax Attorney can do for you.