THE SUBJECT IS TAXING!
Changes in Meal Deductions and a Credit
by Stanton B. Herzog, CPA
Stanton B. Herzog, CPA, serves as ERA’s accountant and is a regular contributor to The Representor. He is available to speak at chapter or group meetings on a variety of financial and tax-related topics. He also participates in Expert Access, the program that offers telephone consultations to ERA members.
Herzog can be reached at 847-975-0409, or by email at firstname.lastname@example.org.
The last year has not been exciting for most people, but Congress has done some tax things that are highly unusual, including running for their lives. To start with, there has been an interesting change to business meals. For years, the law changes have clamped down on the deduction – first clamping down on the three-martini lunch, then requiring more record keeping to justify the deduction, then cutting the deduction in half while eliminating “entertainment meals” completely. Now, we have a reversal. For the years 2021 and 2022, the IRS will allow a deduction of 100 percent instead of 50 percent for business meals – but not every business meal, only those which involve restaurants. Is McDonald’s a restaurant for purposes of this deduction? The IRS says “yes” to any facility not owned by the employer that prepares food for instant eating. Vending machines, or a room full of vending machines, are not restaurants. It seems pretty clear that the IRS will allow meals that are picked up or delivered as well as eaten at the facility. This would stand to reason considering Covid restrictions seem to keep fluctuating regarding eating in restaurants.
It is important to keep in mind that the justification requirements have not changed. The names of the people at the meal, the name of the restaurant, a dated receipt and a brief explanation of the business purpose of the meal are still required. Also, you may need a new expense category in your chart of accounts for restaurant meals as contrasted with homemade and grocery store-bought meals, which would still be deductible, but only at 50 percent. The 100 percent deduction also applies to meals in travel and employee meetings.
While we digest all that (well, I couldn’t resist), Congress has come up with a new tax credit called the Employee Retention Credit. It is a credit against payroll taxes, not income taxes. The big advantage of this law in contrast to other new credits, is that it escapes recapture; it need never be repaid. There are a lot of rules. This credit was retroactive to Jan. 1, 2020, and runs through Dec. 31, 2021, but the rules for 2020 and 2021 are different. Starting with what is common to both years are the following rules:
An employer must qualify for this credit. My view is that there are 2½ ways to qualify:
1. If your operations were shut down by government fiat – either federal or state – due to COVID-19. A significant partial shutdown would also count (e.g., no restaurant seating; or hours of operation curtailed, say 11 a.m. to 3 p.m.).
2. If there was a significant reduction in gross receipts between the same quarter in the previous year. For 2020, it was 50 percent of the 2019 quarter; for 2021, it’s less than 80 percent of the 2019 quarter, but alternatively the 2020 quarter could be used.
2.5. A company start-up in 2021 is presumed eligible since there is no history. But note, a successor business is not a start-up and has to use the income history of the predecessor.
Assuming a company qualifies, the credit is computed by a percentage of payroll:
3. For 2020, the limit for computation of the credit is $10,000 per employee per year. The allowable limit is 50 percent of the employee’s wage. Therefore, the employer can get a maximum annual credit against payroll taxes of $5,000 per employee, usually hitting the maximum by the second or third quarter.
4. For 2021, the limit is $10,000 per employee per quarter and the allowable employee’s wage is 70 percent, or $7,000 per quarter for a maximum credit of $28,000 per year. Some employees might not make the maximum.
Remember in all of this, this is a quarter-by-quarter assessment, so not all quarters may qualify. No double-dipping is allowed. If you obtained any of the other payroll credits you can’t claim this one, and vice-versa. Also, PPP money will be disqualifying if used to pay salaries.