TAKE ADVANTAGE OF SOME RECENT TAX LAW CHANGES CONTAINED IN LATEST STIMULUS PACKAGE
Business Meals Provision
The new law now allows 100% tax deduction for business meals if the food or beverage is provided by a restaurant. This rule applies to expenses paid or incurred in calendar years 2021 and 2022, with an emphasis that takeout and delivery meals provided by a restaurant are also fully deductible.
As a reminder of the existing requirements, for deducting business meals:
- The food and beverages cannot be lavish or extravagant under the circumstances.
- You or one of your employees must be present when the food or beverages are served.
- The food or beverages must be provided to you or to a "business associate." This is defined as a current or prospective customer, client, supplier, employee, agent, partner or professional adviser with whom you could reasonably expect to engage or deal in your business.
Entertainment, unlike the food and beverages, is nondeductible. Therefore, if food or beverages are provided at an entertainment activity, the cost must be stated on a separate bill, invoice or receipt and paid separately.
Employee Retention Credit Expansion and Extension
Under the CARES Act, passed in March 2020, the Employee Retention Credit (ERC) provided a refundable payroll tax credit for 50% of qualified wages of up to $10,000 per employee.
To qualify for the credit, the taxpayer must meet one of two requirements:
- The wages must have been paid during a quarter in which the business was either shut down by government order; or
- The taxpayer must have experienced a 50% or more drop in gross receipts from 2019 to 2020 in the same respective quarter. Once the business reopened, or the gross receipts returned to 80% of 2019’s gross receipts, the quarter no longer qualifies.
The definition of “qualified wages” differs based on the size of the taxpayer:
- For taxpayers with 100 or less full-time employees (FTEs), “qualified wages” equals all wages paid to an employee during an eligible quarter as part of the ERC.
- For taxpayers with more than 100 FTEs, “qualified wages” only includes wages paid for an employee that was not working because the business had been shut down. Wages paid for employees who worked in any capacity (including from home) do not qualify.
The Taxpayer Certainty and Disaster Tax Relief (TCDTR) Act of 2020, Section 206, now allows taxpayers to claim the ERC, even if they received a PPP loan. A retroactive ERC credit can be claimed for 2020 wages, the stipulation being the same wages cannot be used to qualify for both PPP loan forgiveness and the ERC.
The TCDTR also extended the ERC provisions from January 1, 2021 through June 30, 2021, and expanded the credit with the following provisions:
- Increased the ERC rate from 50% to 70% of qualified wages (increasing the credit from $5,000 per employee to $7,000 per employee).
- Expanded the eligibility for the credit by reducing the required year-over-year gross receipts decline from 50% to 20% and provided a safe harbor allowing employers to use prior quarter gross receipts to determine eligibility.
- Increased the limit on qualified wages from $10,000 for the year to $10,000 for each quarter [the previous maximum credit per employee was $5,000 ($10,000 x 50%) and now the maximum credit per employee is $14,000 [($10,000 x 70%) + ($10,000 x 70%)]; and
- Increased the 100 FTE delineation for determining the relevant qualified wage base to employers with 500 or fewer FTEs.
In summary, employers should review their 2020 activity to see if any wages qualify (after PPP loan forgiveness) for the retroactive credit of up to $5,000 per employee. Employers should ALSO review their 2021 activity to determine if any wages qualify (after PPP loan forgiveness) for the current year credit of up to $14,000 per employee for the first two quarters of the year.
The credit will be claimed on the taxpayer’s quarterly Form 941 payroll tax return. For additional guidance on who qualifies and how to claim the credit for ERC, please contact your payroll provider for assistance.