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The Internal Revenue Service on Wednesday (Feb. 26) came out with new regulation to “provide guidance” about business meals and related tax deductions. Basically, the tax agency is issuing its  interpretations of the federal Tax Cuts and Jobs Act from 2017 that cut out some deductions — most notably, the tax breaks for entertainment expenses.

But, although those disappeared at the end of 2017, company owners and their employees still can deduct part of the costs of true business meals. For example, if a sales representative takes a potential client out to dinner for business reasons, the company can deduct half (50%) of the meal’s cost. However, they can’t get outrageous. The IRS rule says the deduction is okay if the “expense is not lavish or extravagant under the circumstances.”

Employees are considered to be business associates, so the company can deduct their meal costs while traveling for business at the 50 percent rate. 

Then, there also are some common situations when a business owner can write off the whole cost of food for employees.   For example, any food and drinks offered free of charge to the general public are 100 percent deductible. A company-wide party or lunch also qualifies. And, as you might suspect, if the business provides meals as part of employee’s taxable pay, then the business can take the deduction.

 A couple of years ago, an IRS ruling verified a full deduction for food expenses in business presentations involving the general public.  A real estate agent showing a house, for example, can write off the costs of cookies, hors d’oeuvres or even wine as legitimate business expenses.  The key is that the food must be available to the public as part of the open house.

Likewise, a financial adviser who hosts clients for a business presentation also can enjoy the full deduction at tax time. Both are considered business expenses, the Bradford Tax Institute noted. One main requirement in both cases is that all the clients are outside business prospects. They can’t be relatives, co-workers or “an exclusive list of guests,” as the IRS rule says.

The public can comment on the proposed regulation, called “Meals and Entertainment Expenses Under Section 274,” until April 13.  See https://www.federalregister.gov/documents/2020/02/26/2020-03723/meals-and-entertainment-expenses-under-section-274 .

Eric Buechler, owner of EricJohn Ltd. and an IRS-approved enrolled agent, commented on another common situation that was not directly covered in the new rules.  Employers can take a full (100 per cent) deduction for costs of food/beverages for employees at work meetings that are held in-house and are for the convenience of the employer, he said.   Eric who is an IRS-approved enrolled agent, can help small business owners deal with the details about deductions involving business meals.

It’s Monday, Jan. 27, and the computers at the Internal Revenue Service will begin to gulp in 2019 returns from individual taxpayers today. They’ll be processing a deluge of numbers. The IRS expects to collect 150 million returns just from individuals this season.

Nonetheless, the earliest filers won’t be the bulk of those returns. Many of us still are waiting for necessary records – such as W-2 and 1099 forms from employers – to land in our mailboxes before filing. For example,  Friday (Jan. 31) is the IRS’s deadline for employers to send out those pay reports to workers. In practice, that means they could arrive early in February.

The other end of the tax filing season – the due date for tax returns and payments – is standard April 15 this year. It’s been a day or two later in some recent years due to quirks in the calendar and a local holiday in the nation’s capital.  

If it’s any help, let us note that 2020 is a leap year, and the leap day, Feb. 29, falls deep in tax filing season. So, we all are getting one more day than usual to prepare and pay up, thanks to the calendar.

What will be new when taxpayers and their preparers start figuring?  They’ll encounter a redesigned Form 1040, for one change. It’s built to be simpler.

 Many taxpayers who work for companies also might want to adjust their withholding rates after seeing their tax bills.  There’s a new W-4 “Employee’s Withholding Certificate” that reflects changes made in the big revision of the tax code late in 2017.  (Making a change is not required just because of the redesign, though, the IRS says.) 

We’ll talk about the new 1040 and W-4 in future posts.  But, for now, Eric Buechler, owner of EricJohn Ltd. and an enrolled agent recognized by the IRS, says paying attention to the 2020 W-4 can be important. He compared withholdings from a tax return using a 2019 W-4 with the same return using the newest W-4 for 2020. Sure enough, “Withholdings were different,” he says.  

The IRS is offering a new tax withholding estimator at its Web site.  (See https://www.irs.gov/individuals/tax-withholding-estimator ) Eric says his clients also can stop in for a personal tax projection.

Actually, if you work with any tax preparer on your return, it’s a good idea to reserve some time soon.  Get on his/her work list. For example, Eric already is setting up schedules for interviews for preparing federal and state tax returns.

Welcome to a new tax filing season!

Would the International Organization of Historic Postal Stamp Collectors, if it existed, qualify for a tax-free charitable contribution on your return? How about disaster relief organizations? In the final two weeks of the tax year, you might want to know – and fast.

Last week we promised to pass along some guidance from the Internal Revenue Service about donations to charities and other tax-exempt organizations. Charitable giving is one of the few steps you can take to reduce taxes just before year-end, which now is less than two weeks away.

Taxpayers can write a check or send money electronically to a non-profit or other charity of their choice. Donating property also is allowed. Just make sure that any donations are made before the close of the year, which, for most individual taxpayers, is 11:59 p.m. on Dec. 31.

Is your favorite charity or non-profit eligible for a tax exemption on your return?  Here’s a short list of the types of organizations that qualify:

• Federal, state and local governments in the United States
• Community funds created and operated exclusively for religious, educational, scientific and other benevolent purposes, including prevention of cruelty to children or animals.
• Churches, synagogues, other religions organizations.
• Veterans organizations
• Fraternal societies, but only if the contribution is used exclusively for charitable purposes.
• Non-profit cemeteries, but not the individual lots within them.

Then, we can drill down further – even to specific, local charities on your list, with your computer or smartphone. The IRS provides a Tax Exempt Organization Search online and has announced that taxpayers can rely on it for their returns. Go to:   https://www.irs.gov/charities-non-profits/tax-exempt-organization-search  and click through at the bottom of the page to the search tool.

We’re just skimming the surface here, of course. For a deeper dive into donations, check IRS  Publication 526, “Charitable Contribution.” It is available at the IRS Web Site, www.irs.gov.  Of course, Eric Buechler, proprietor of EricJohn Ltd., also can show you how to navigate the tax rules for tax-deductible contributions to charities and other non-profit groups.

It’s the time of the year when charity abounds and, at the same time, tax returns loom ahead. 

Yes, you can help others AND, sometimes, yourself with year-end giving. But you might need to plan how to give, especially with tax reforms now solidly in place.

Briefly, the only way for individual taxpayers to claim a federal tax deduction for charitable contributions is to itemize on Schedule A.  That schedule basically adds together list of expenses ranging from medical insurance premiums to interest on home loans for deduction on the tax return. Charitable donations are among them.

But here’s also where many taxpayers willingly pass up the chance to deduct. The most recent tax reforms increased the standard deduction, which is an automatic benefit, to $12,200 for a single taxpayer or $24,400 for a married couple filling a joint return. If itemized deductions on Schedule A don’t reach those levels, taxpayers generally will pay less in taxes by taking the standard route. On the other hand, if their itemized deductions do exceed the standard, taxpayers usually will pay less tax using Schedule A’s values.

Many charitable deductions are more flexible than other expenses. You might be able to hasten or delay your contributions a few weeks in order to limit taxes.  “If (you’re)  at or over (the standard deduction  on Schedule A), take items in this year,” EricJohn Ltd. owner Eric Buechler says.  If you’re well under, it might pay to wait and bunch up two years of donations in January to help reduce taxes for your 2020 return.

Eric, who is an enrolled agent recognized by the Internal Revenue Service, can help taxpayers decide when charitable contributions make the best impact in lowering income taxes

The IRS also offers some tips about charitable contributions themselves. For example, in the upcoming year, most political groups – even if they are structured as non-profit organizations – won’t qualify for charitable deductions. We’ll pass along some of those guidelines in the next week.

Taking an IRA distribution before age 59½ is one of those times when a worker must watch the calendar. You’ll want to be acting quickly and counting the days, as you’ll see here.

Sometimes a taxpayer wants to move money from one retirement account to another, or perhaps he/she receives an unexpected distribution directly from a retirement account. If the taxpayer is younger than 59½ years old, a clock starts ticking on arrival.  He/she must roll over that money in a similar retirement account within 60 days, or the money will be heavily taxed.

 This is not a time to dawdle or delay. If the rollover is not deposited on time, the IRS will charge the person’s normal income tax plus another 10 percent tax for an early distribution.

Can the problem be avoided? Yes, by using a “direct rollover.”  With that strategy, the taxpayer never touches the distributed cash. The retirement plans themselves move the money.

This area of early distributions has a slew of exceptions to the extra 10 percent tax. Basically, if the taxpayer missed the 60-day deadline for some reason outside his/her control, the IRS can waive the penalty tax. A traditional IRA also waives the 10 percent tax on withdrawals of as much as $10,000 for taxpayers who want to buy their first homes.  

There are a number of exceptions and rules involved with early IRA distributions. Feel free to contact Eric Buechler, owner of EricJohn Ltd., for guidance on the tax implications of retirement plans.

It hasn’t been much noticed, but employers will be able to help their workers afford health expenses to a greater degree beginning next year.

 Remember the Health Reimbursement Arrangement, or “HRA”? It allowed employers to provide pre-tax dollars for their workers to pay health insurance premiums and out-of-pocket medical expenses. It has a history that dates back to 1954.

The HRA pretty much disappeared when “Obamacare” (Affordable Care Act) arrived. It survived on the books only in limited fashion.

Now the HRA has reappeared in its former glory! Employers large or small can offer it. Their employees also have fewer constraints. The Internal Revenue Service just released the new rules governing the HRA accounts in June.

As a result, business and non-profit agencies can assist their workers in buying insurance pretty much without limit, beginning on Jan. 1, 2020. In effect, that means for the 2020 tax year.

 Of course, it still is up to those employers to decide whether to offer HRA benefits in the first place. Here’s one important carrot for them. There are no ceilings on the amount of HRA money they can provide pre-tax to workers. 

The new rules also broaden use of HRA benefits. For example, individual workers and their families can use their HRA dollars for coverage through the “marketplace” insurance exchanges created under Obamacare. That wasn’t possible from the beginning of Obamacare until this revision appeared.

Eric Buehler, who is an IRS-approved enrolled agent, sees advantages to the newly revised Health Reimbursement Arrangements.  “I think this will really help individuals and small business,” says Eric, owner of EricJohn Ltd.

 But, let’s add a caution here. For some individuals, tapping an employer-provided HRA also could reduce or eliminate premium tax credits connected to coverage under the exchanges.

Employers also can run into complications when combining HRAs with other payroll plans, such as a Health Savings Accounts. Among them, companies must decide between a group health plan and HRA; they can’t offer both at the same time to any single work group within the firm.

Feel free to contact Eric at EricJohn Ltd., whether you’re a small business interested in offering an HRA or an employee who might benefit from your company’s HRA plan.

On Wednesday this week, taxpayers who help to pay for college educations officially could celebrate. Did you take time out to cheer National 529 College Savings Day?

Well, it probably wasn’t high on the day’s to-do list for most of us.  But, Minnesotans who contribute to a college savings plan ought to take a hint from the observance and look into two of the state’s educational tax breaks.

Many will be eligible for either the Education Savings Account Contribution Credit or the similar Education Savings Account Contribution Subtraction.

Both of these allowances are broad. They apply to contributions to any state’s college savings plan, the Minnesota Department of Revenue announced.   They are not limited to Minnesota’s plan.

In addition, any state taxpayer who makes a contribution can claim the credit or the subtraction. Translation:  You don’t have to be the account owner or the student benefiting from it to take the tax break.

How can this affect your tax return? The Education Savings Account Contribution Credit is particularly powerful, because it directly reduces taxes. It gives back 50 percent of your contributions to a maximum of $500.  However , it also requires income limits. Minnesota Revenue announced that the credit begins phasing out when a taxpayer reports more than $75,000 in Minnesota Adjusted Gross Income. The credit disappears at $101,900 for a single taxpayer and $162,680 for married couples. (2018 figures)

The Education Savings Account Contribution Subtraction does not require any income limits. However, it does reduce contributions by the amount of money distributed from the savings plan during the year. Still, the amount of the subtraction could be as much as $1,500 in income for a single taxpayer and $3,000 in income for a married couple. That’s a nice reward in any case.

Taxpayers calculate the tax credit or the subtraction on Schedule M1529. 

Here are two important notes:  

• A taxpayer can claim only one of the tax breaks. It’s either the credit or the subtraction – not both.
• These tax deductions apply only to college savings plans. Expenses for K-12 education have separate tax breaks in Minnesota.

For more information, jump to these pages on Minnesota Revenue’s Web site:

Education Savings Account Contribution Credit —  https://www.revenue.state.mn.us/individuals/individ_income/Pages/EducationSavingsAccountContributionCredit.aspx

Education Savings Account Contribution Subtraction – https://www.revenue.state.mn.us/individuals/individ_income/Pages/EducationSavingsAccountContibutionsSubtraction.aspx

For more detailed guidance about these Minnesota’s tax incentives, contact Eric Buechler at EricJohn Ltd.

One way Minnesota recognizes its military members and their service comes in their tax returns!

The state Department of Revenue decided that this month, which is National Military Appreciation Month would be a good time to recap the list of tax deductions and other courtesies available to Minnesota’s men and women in the Armed Forces. They often include Minnesota residents serving actively with regular forces, reserves or National Guard

You can look up a list of tax breaks at one Internet address. Minnesota Revenue’s military information page  is:  https://www.revenue.state.mn.us/individuals/individ_income/Pages/Members_of_the_Military.aspx

Here are a few to note:

• Active duty military pay subtraction – Many taxpayers serving in the military can take pay for active duty off their Minnesota taxable income.  The subtraction extends even to re-enlistment bonuses and National Guard responses to emergencies.  
• Tax credit for service in a combat zone — This tax break covers combat and hazardous duty pay for service after Jan. 1, 2015. The credit could amount to as much as $120 for each month in the hazardous zone, Minnesota Revenue says. Taxpayers also can make claims backwards for years 2016, 2017 and 2018, if they haven’t so far. The filing period for the year 2015 ends on Oct. 15, 2019. The taxpayer actually  applies for this credit separately from his/her normal income tax return, and, once approved, the credit is  refundable. That means the state pays it even if no more taxes are due.
• Military pension subtraction – Veterans can cut pensions and some other types of military retirement pay from their Minnesota returns. (Those retirement payments must be taxable on the federal return.)  Or, going in another direction, veterans  who qualify, can take the state’s “Credit for Past Military Service.”  But they can’t take both at once, Minnesota Revenue says.

Minnesota offers several more items of tax relief to military, including extensions of times to file returns. A good wrap-up is found in a detailed fact sheet available at Minnesota Revenue’s Web site. Take a look: https://www.revenue.state.mn.us/individuals/individ_income/factsheets/fact_sheets_fs5a.pdf

Also, feel free to call on us at EricJohn Ltd. to keep up with Minnesota’s military tax benefits.