In latest edition of The Wright Toolbox:
- Employee Retention Tax Credit Update – read now
- Temporary Tax Deduction Increase to 100% for Business Meals – read now
Employee Retention Tax Credit Update
by Morgan Dilks
As part of the CARES Act enacted on March 27, 2020, Congress enacted a tax credit which provided eligible employers with a refundable tax credit for up to $5,000 per employee for qualified wages paid from March 13, 2020 through December 31, 2020. This is called the Employee Retention Tax Credit (the “2020 ERTC”). Eligible employers may be eligible to receive a refundable tax credit under the 2020 ERTC for up to $5,000 if their business was either (i) partially or fully suspended due to COVID-19 orders from an appropriate government authority, or (ii) experienced a significant decline in gross receipts.
On December 20, 2020, Congress passed the Consolidated Appropriations Act of 2021 (“CAA”), which greatly expanded the 2020 ERTC. Under the 2021 ERTC, an eligible employer can obtain a refundable tax credit capped at $7,000 per employee, per calendar quarter, for 70% of qualified wages up to $10,000 paid per calendar quarter to employees from January 1, 2021 through June 30, 2021.
The specific rules determining eligibility vary between the 2020 ERTC and the 2021 ERTC, but are structured similarly. To qualify for the 2020 ERTC, an eligible employer must have experienced a partial or full suspension of operations, or have experienced a significant decline in gross receipts, where gross receipts in a given quarter for 2020 were reduced by more than 50% over the same quarter in 2019. This was expanded for the 2021 ERTC. While the same rules apply regarding partial and full suspension of operations as they did for the 2020 ERTC, for the 2021 ERTC an eligible employer is considered to have experienced a significant decline in gross receipts where gross receipts in a given quarter for 2021 were reduced by more than 20% over the same quarter in 2019.
Under the CARES Act, an eligible employer who previously accepted a PPP Loan was not eligible to pursue the 2020 ERTC. This has been changed retroactively by the CAA, and now, employers who accepted PPP Loans in 2020 can also qualify for the 2020 ERTC.
Determining whether or not a business can take advantage of the 2020 and/or 2021 ERTCs can be tricky. Some businesses have experienced widespread suspensions due to government orders, with little effect on their gross receipts. Others may have experienced major effects on gross-receipts without having their operations partially or fully suspended by government orders. If you think you may qualify, but would like to discuss your options, feel free to contact me at firstname.lastname@example.org.
Temporary Tax Deduction Increase to 100% for Business Meals
For those who thrive making business deals across a dinner table, or who enjoy treating clients to a favorite local lunch spot, there’s exciting news. The IRS has temporarily increased tax deductions for business meal expenses from the usual 50% to a full 100% between December 31, 2020 and January 1, 2023. This includes food and beverages provided by a restaurant, with the goal of increasing business spending at restaurants after a year of instability and fluctuation. The change was included in the Consolidated Appropriations Act of 2021.
The IRS notice (Notice 2021-25) defines the term “restaurant” as a business that prepares and sells food or beverages to retail customers for immediate consumption, whether or not the food or beverages are consumed on the business’s premises. This means the deduction applies to catering and takeout. A restaurant does NOT include a business that primarily sells pre-packaged food or beverages not for immediate consumption. For example, food or beverages purchased from grocery stores; specialty food stores; beer, wine, or liquor stores; drug stores; convenience stores; newsstands or a vending machine or kiosk would not qualify for the deduction. The definition also excludes eating facilities on business premises that are used to provide meals outside of an employee’s compensation, and employer-operated facilities that are considered de minimis fringe.
So, what kind of meals are 100% deductible? Assuming that the food is ordered from a restaurant satisfying the above guidelines, the deduction can apply to meals such as business-related lunches with clients, food provided for employees working late, spreads provided to the public for free, catering for stakeholder meetings, and travel meals, among others.
Entertainment expenses remain non-deductible unless the food is paid for separately or can be itemized out from the overall invoice. In conjunction with this, for the 100% deduction to apply, costs must not be lavish or extravagant, and the taxpayer or an employee of the taxpayer must be present for said meal.
You can read the IRS’s released notice on Section 274(n)(2) in full here.
So, start lining up those business lunches!