Contact us with any questions you may have about these or other tax matters.

Gifts to customers

If you give gifts to customers and clients, they’re deductible up to $25 per recipient per year. For purposes of the $25 limit, you don’t need to include “incidental” costs that don’t substantially add to the gift’s value. These costs include engraving, gift wrapping, packaging and shipping. Also excluded from the $25 limit are branded marketing items — such as those imprinted with your company’s name and logo — provided they’re widely distributed and cost less than $4.

The $25 limit is for gifts to individuals. There’s no set limit on gifts to a company (for example, a gift basket for all team members of a customer to share) as long as the costs are “reasonable.”

Gifts to employees

In general, anything of value that you transfer to an employee is included in his or her taxable income (and, therefore, subject to income and payroll taxes) and deductible by your business. But there’s an exception for noncash gifts that constitute a “de minimis” fringe benefit.

These are items that are small in value and given infrequently that are administratively impracticable to account for. Common examples include holiday turkeys, hams, gift baskets, occasional sports or theater tickets (but not season tickets) and other low-cost merchandise.

De minimis fringe benefits aren’t included in an employee’s taxable income yet they’re still deductible by your business. Unlike gifts to customers, there’s no specific dollar threshold for de minimis gifts. However, many businesses use an informal cutoff of $75.

Cash gifts — as well as cash equivalents, such as gift cards — are included in an employee’s income and subject to payroll tax withholding regardless of how small and infrequent.

Throw a holiday party

In general, holiday parties are fully deductible (and excludible from recipients’ income). And for calendar years 2021 and 2022, a COVID-19 relief law provides a temporary 100% deduction for expenses of food or beverages “provided by” a restaurant to your workplace. Previously, these expenses were only 50% deductible. Entertainment expenses are still not deductible.

The use of the words “provided by” a restaurant clarifies that the tax break for 2021 and 2022 isn’t limited to meals eaten on a restaurant’s premises. Takeout and delivery meals from a restaurant are also generally 100% deductible. So you can treat your on-premises staff to some holiday meals this year and get a full deduction.

Show your holiday spirit

Contact us if you have questions about the tax implications of giving holiday gifts or throwing a holiday party.

What’s considered a casualty for tax purposes? It’s a sudden, unexpected or unusual event, such as a hurricane, tornado, flood, earthquake, fire, act of vandalism or a terrorist attack.

More difficult to qualify

For losses incurred through 2025, the TCJA generally eliminates deductions for personal casualty losses, except for losses due to federally declared disasters. For example, during the summer of 2021, there have been presidential declarations of major disasters in parts of Tennessee, New York state, Florida and California after severe storms, flooding and wildfires. So victims in affected areas would be eligible for casualty loss deductions.

Note: There’s an exception to the general rule of allowing casualty loss deductions only in federally declared disaster areas. If you have personal casualty gains because your insurance proceeds exceed the tax basis of the damaged or destroyed property, you can deduct personal casualty losses that aren’t due to a federally declared disaster up to the amount of your personal casualty gains.

Special election to claim a refund

If your casualty loss is due to a federally declared disaster, a special election allows you to deduct the loss on your tax return for the preceding year and claim a refund. If you’ve already filed your return for the preceding year, you can file an amended return to make the election and claim the deduction in the earlier year. This can potentially help you get extra cash when you need it.

This election must be made by no later than six months after the due date (without considering extensions) for filing your tax return for the year in which the disaster occurs. However, the election itself must be made on an original or amended return for the preceding year.

How to calculate the deduction

You must take the following three steps to calculate the casualty loss deduction for personal-use property in an area declared a federal disaster:

1. Subtract any insurance proceeds.
2. Subtract $100 per casualty event.
3. Combine the results from the first two steps and then subtract 10% of your adjusted gross income (AGI) for the year you claim the loss deduction.

Important: Another factor that now makes it harder to claim a casualty loss than it used to be years ago is that you must itemize deductions to claim one. Through 2025, fewer people will itemize, because the TCJA significantly increased the standard deduction amounts. For 2021, they’re $12,550 for single filers, $18,800 for heads of households, and $25,100 for married joint-filing couples.

So even if you qualify for a casualty deduction, you might not get any tax benefit, because you don’t have enough itemized deductions.

Contact us

These are the rules for personal property. Keep in mind that the rules for business or income-producing property are different. (It’s easier to get a deduction for business property casualty losses.) If you are a victim of a disaster, we can help you understand the complex rules.

How it works

You can claim an itemized deduction on your tax return for real estate taxes and home mortgage interest. Most other home ownership costs can’t be deducted currently. However, these costs may increase your home’s “basis” (your cost for tax purposes). And a higher basis can save taxes when you sell.

The law allows an exclusion from income for all or part of the gain realized on the sale of your home. The general exclusion limit is $250,000 ($500,000 for married taxpayers). You may feel the exclusion amount makes keeping track of the basis relatively unimportant. Many homes today sell for less than $500,000. However, that reasoning doesn’t take into account what may happen in the future. If history is any indication, a home that’s owned for 20 or 30 years appreciates greatly. Thus, you want your basis to be as high as possible in order to avoid or reduce the tax that may result when you eventually sell.

Good recordkeeping

To prove the amount of your basis, keep accurate records of your purchase price, closing costs, and other expenses that increase your basis. Save receipts and other records for improvements and additions you make to the home. When you eventually sell, your basis will establish the amount of your gain. Keep the supporting documentation for at least three years after you file your return for the sale year.

Start with the purchase price

The main element in your home’s basis is the purchase price. This includes your down payment and any debt, such as a mortgage. It also includes certain settlement or closing costs. If you had your house built on land you own, your basis is the cost of the land plus certain costs to complete the house.

You add to the cost of your home expenses that you paid in connection with the purchase, including attorney’s fees, abstract fees, owner’s title insurance, recording fees and transfer taxes. The basis of your home is affected by expenses after a casualty to restore damaged property and depreciation if you used your home for business or rental purposes,

Over time, you may make additions and improvements to your home. Add the cost of these improvements to your basis. Improvements that add to your home’s basis include:

• A room addition,
• Finishing the basement,
• A fence,
• Storm windows or doors,
• A new heating or central air conditioning system,
• Flooring,
• A new roof, and
• Driveway paving.

Home expenses that don’t add much to the value or the property’s life are considered repairs, not improvements. Therefore, you can’t add them to the property’s basis. Repairs include painting, fixing gutters, repairing leaks and replacing broken windows. However, an entire job is considered an improvement if items that would otherwise be considered repairs are done as part of extensive remodeling.

The cost of appliances purchased for your home generally don’t add to your basis unless they are considered attached to the house. Thus, the cost of a built-in oven or range would increase basis. But an appliance that can be easily removed wouldn’t.

Plan for best results

Other rules and requirements may apply. We can help you plan for the best tax results involving your home’s basis.

Itemizers must meet a threshold

For 2020, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 7.5% of your adjusted gross income (AGI). This threshold amount is scheduled to increase to 10% of AGI for 2021. You also must itemize deductions on your return in order to claim a deduction.

If your total itemized deductions for 2020 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2020 may allow you to exceed the 7.5% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.

In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:

• Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.
• Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 17¢ a mile for miles driven in 2020, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.
• Eyeglasses, hearing aids, dental work, prescription drugs and more. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as medical marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.
• Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.

Costs for dependents

You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. Contact us if you have questions about medical expense deductions.

TCJA rule changes

Prior to the Tax Cuts and Jobs Act (TCJA), Section 274 of the Internal Revenue Code generally prohibited deductions for expenses related to entertainment, amusement or recreation (commonly referred to as “entertainment” expenses). The tax code granted exceptions, however, for entertainment expenses “directly related to” or “associated with” actively conducting business. Businesses generally could deduct 50% of such expenses.

The tax code also limited deductions for food and beverage expenses that satisfied one of the exceptions. A deduction was permitted only if 1) the expense wasn’t lavish or extravagant under the circumstances, and 2) the taxpayer (or an employee of the taxpayer) was present when the food or beverages were furnished. The amount of the deduction was limited to 50% of such expenses.

The TCJA amended Sec. 274 to generally prohibit deductions for any expenses related to entertainment, regardless of whether they’re directly related to or associated with conducting business. Some taxpayers wondered if the amendment also banned deductions for business meal expenses.

The IRS responded to this question in the fall of 2018 with Notice 2018-76. The notice listed several circumstances under which businesses could continue to treat business meal expenses, including meals consumed by employees on work travel, as 50% deductible expenses until the IRS published its proposed regulations explaining when business meal expenses are nondeductible entertainment expenses.

Applicability of the proposed regulations

The proposed regulations provide that the deduction limitation rules generally apply to all food and beverages, whether characterized as meals, snacks or other types of food or beverage items. The deduction limitations apply even to food and beverages treated as de minimis fringe benefits.

The proposed regulations define food or beverage expenses as the cost of food or beverages, including any delivery fees, tips and sales tax. But the deductible expenses for employer-provided meals at an eating facility don’t include operating expenses for the facility (for example, the salaries of employees preparing and serving meals and other overhead costs).

Food and beverages at entertainment activities

Food or beverages provided during or at an entertainment activity aren’t considered nondeductible entertainment expenses under the proposed regulations as long as they’re purchased separately from the entertainment, or their cost is stated separately from the entertainment cost on a bill, invoice or receipt. For example, let’s say you take a client to a football game. You buy some food at the game and pay for it separately from the game tickets. The amount may qualify for a deduction, if you meet certain other requirements.

The 2018 notice provided that taxpayers couldn’t circumvent this entertainment disallowance rule by inflating the amount charged for food and beverages. The proposed regulations tackle this issue by requiring that the amount charged for food or beverages reflect 1) the venue’s usual selling cost for those items if purchased separately from the entertainment, or 2) the reasonable value of the items.

Business meal expenses

The proposed regulations generally follow the lead of the 2018 guidance on the deductibility of business meal expenses, but also incorporate other statutory requirements taxpayers must meet to deduct 50% of the expense. Thus, businesses may deduct 50% of business meal expenses if:

• The expense isn’t lavish or extravagant under the circumstances,
• The taxpayer (or an employee of the taxpayer) is present at the furnishing of the food or beverages, and
• The food and beverages are provided to a business associate.

The proposed regulations also clarify the requirement in Notice 2018-76 that the food and beverages be provided to a “business contact.” The notice described such an individual as a current or potential business customer, client, consultant, or similar business contact.

The proposed regulations use the term “business associate,” defined as a person the taxpayer could reasonably expect to engage with in business, including a current or prospective customer, client, supplier, employee, agent, partner, or professional advisor. The inclusion of employees makes the standard applicable to employer-provided meals and situations where a business provides meals to both employees and nonemployee business associates at the same event.

Travel meal expenses

Although the TCJA didn’t explicitly change the rules for travel expenses, the proposed regulations are intended to provide comprehensive rules for food and beverage expenses. As a result, they apply the general rules for meal expenses to travel meals.

The proposed regulations also incorporate statutory substantiation requirements for travel meal expenses — evidence of the amount, time and place, and business purpose of the meal. In addition, meal expenses for spouses, dependents or other individuals accompanying the taxpayer (or an employee of the taxpayer) on business travel generally aren’t deductible unless the individual is an employee of the taxpayer and traveling for a bona fide business purpose.

Other food and beverage expenses

In addition, the proposed regulations provide that business meal expenses and 50% deduction limits don’t apply to expenses that fall within one of the following exceptions:

• Expenses treated as compensation,
• Reimbursed food and beverage expenses,
• Expenses related to recreational, social or similar activities for employees, such as holiday parties, annual picnics and summer outings that don’t favor highly compensated employees (but not free food and beverages in break rooms or provided for the convenience of the employer, such as that provided for employees who must stay on call for emergencies),
• Items available to the public (as long as more than 50% of the actual or reasonably estimated consumption is by the general public, including customers, clients and visitors), and
• Goods and services sold to customers (for example, food or beverage items that are purchased as part of preparing and providing meals to a restaurant’s paying customers, which are also consumed at the worksite by employees).

These expenses all are fully deductible.

Final regulations are on the way

Comments on the proposed regulations must be submitted by April 13, 2020, and a public hearing may be held. In the meantime, you can rely on the proposed regulations as well as the guidance in Notice 2018-76 until the IRS issues final regulations. If you have questions on business-related meal and beverage expenses, please don’t hesitate to contact us.

First, keep in mind that you must itemize deductions in order to take advantage of the mortgage interest deduction.

Deduction and limits for “acquisition debt”

A personal interest deduction generally isn’t allowed, but one kind of interest that is deductible is interest on mortgage “acquisition debt.” This means debt that’s: 1) secured by your principal home and/or a second home, and 2) incurred in acquiring, constructing or substantially improving the home. You can deduct interest on acquisition debt on up to two qualified residences: your primary home and one vacation home or similar property.

The deduction for acquisition debt comes with a stipulation. From 2018 through 2025, you can’t deduct the interest for acquisition debt greater than $750,000 ($375,000 for married filing separately taxpayers). So if you buy a $2 million house with a $1.5 million mortgage, only the interest you pay on the first $750,000 in debt is deductible. The rest is nondeductible personal interest.

Higher limit before 2018 and after 2025

Beginning in 2026, you’ll be able to deduct the interest for acquisition debt up to $1 million ($500,000 for married filing separately). This was the limit that applied before 2018.

The higher $1 million limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from the refinancing of pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing doesn’t exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won’t be subject to the $750,000 limitation.

The limit on home mortgage debt for which interest is deductible includes both your primary residence and your second home, combined. Some taxpayers believe they can deduct the interest on $750,000 for each mortgage. But if you have a $700,000 mortgage on your primary home and a $500,000 mortgage on your vacation place, the interest on $450,000 of the total debt will be nondeductible personal interest.

“Home equity loan” interest

“Home equity debt,” as specially defined for purposes of the mortgage interest deduction, means debt that: is secured by the taxpayer’s home, and isn’t “acquisition indebtedness” (meaning it wasn’t incurred to acquire, construct or substantially improve the home). From 2018 through 2025, there’s no deduction for home equity debt interest. Note that interest may be deductible on a “home equity loan,” or a “home equity line of credit,” if that loan fits the tax law’s definition of “acquisition debt” because the proceeds are used to substantially improve or construct the home.

Home equity interest after 2025

Beginning with 2026, home equity debt up to certain limits will be deductible (as it was before 2018). The interest on a home equity loan will generally be deductible regardless of how you use the loan proceeds.

Thus, taxpayers considering taking out a home equity loan— one that’s not incurred to acquire, construct or substantially improve the home — should be aware that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt (again, meaning debt that’s not incurred to acquire, construct or substantially improve the home) will currently lose the interest deduction for interest on that debt.

Contact us with questions or if you would like more information about the mortgage interest deduction.

Do you qualify?

You can make a deductible contribution to a traditional IRA if:

• You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or
• You (or your spouse) are an active participant in an employer plan, and your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status.

For 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI. If you’re single or a head of household, the phaseout range is $64,000 to $74,000 for 2019. For married filing separately, the phaseout range is $0 to $10,000. For 2019, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $193,000 and $203,000.

Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply).

IRAs often are referred to as “traditional IRAs” to distinguish them from Roth IRAs. You also have until July 15 (date changed due to COVID-19) to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older.

Here are a couple other IRA strategies that might help you save tax.

1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2019? That may help you years down the road when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above.

2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you manage the home front. In this case, you may be able to take advantage of a spousal IRA.

How much can you contribute?

For 2019 if you’re qualified, you can make a deductible traditional IRA contribution of up to $6,000 ($7,000 if you’re 50 or over).

In addition, small business owners can set up and contribute to a Simplified Employee Pension (SEP) plan up until the due date for their returns, including extensions. For 2019, the maximum contribution you can make to a SEP account is $56,000.

If you’d like more information about whether you can contribute to an IRA or SEP, contact us or ask about it when we’re preparing your return. We’d be happy to explain the rules and help you save the maximum tax-advantaged amount for retirement.

The IRS has issued new guidance updating the rules for using optional standard mileage rates when calculating “above-the-line” deductions for the costs of operating an automobile for certain purposes. IRS Revenue Procedure 2019-46 also lays out rules for establishing the amount of an employee’s transportation expenses that are reimbursed using the optional standard mileage rates.

Understanding the allowable deductions

The Tax Cuts and Jobs Act (TCJA) temporarily suspends all miscellaneous itemized deductions that are subject to the 2% floor, until 2026. The suspension applies to most employees’ miscellaneous itemized deductions for unreimbursed business expenses — including the costs of operating an automobile for business and unreimbursed travel costs.

But self-employed individuals and qualified employees (including Armed Forces reservists, qualifying state or local government officials, educators, and performing artists) are still allowed to deduct unreimbursed expenses during the suspension. The suspension doesn’t preempt the deductions because these taxpayers can claim the expenses “above the line,” or when computing their adjusted gross income (AGI), rather than as itemized, below-the-line deductions. The guidance provides rules for how to do so.

Using the business standard rate

For owned or leased automobiles used for business, taxpayers generally can deduct an amount equal to either:

• The business standard mileage rate (for 2019, 58 cents) multiplied by the number of business miles traveled, or
• The actual fixed and variable costs paid that are attributable to traveling those business miles.

The new guidance provides that eligible taxpayers generally can use the business standard mileage rate instead of actual fixed and variable costs when computing AGI, subject to certain limitations. (For example, you can’t use the business rate for fleet operations of five or more autos.)

If you opt to use the business rate, though, you generally can’t also deduct your costs for items such as depreciation or lease payments, maintenance and repairs, tires, gasoline (including all taxes), oil, insurance, and license and registration fees.

You can, however, deduct parking fees and tolls attributable to business use above the line. Under certain circumstances, you also can deduct interest on the purchase of the automobile and related state and local property taxes. (If the auto isn’t used solely for business purposes, these expenses must be allocated accordingly.)

As for depreciation, taxpayers are required to reduce the basis of an automobile used in business by the greater of the amount of depreciation claimed or allowable. Under the guidance, in any year during which you use the business standard mileage rate, a specified per-mile amount (published annually by the IRS) is treated as both the depreciation claimed and the depreciation allowable.

The guidance also provides that taxpayers with deductible unreimbursed travel expenses can use the business standard mileage rate when calculating their AGI.

Documenting transportation expenses

The new guidance includes rules for documenting — or “substantiating” — the amount of an employee’s ordinary and necessary transportation expenses that an employer, its agent or a third party reimburses using a mileage allowance.

According to the guidance, an employee will be deemed to satisfy the substantiation requirements if he or she actually substantiates to the reimbursing party the time, place (or use) and business purpose of the expense. The amount is considered substantiated simply because the reimbursing party pays a mileage allowance instead of reimbursing the actual transportation expenses the employee incurs or may incur (subject to certain limitations).

Under the revenue procedure, self-employed individuals and qualified employees aren’t required to include in gross income the portion of a mileage allowance received from an employer, its agent or a third party that is less than or equal to the amount deemed substantiated. Assuming other requirements for accountable plans — plans that comply with IRS requirements for reimbursing workers for business expenses in which reimbursement isn’t counted as income — are met, that portion of the allowance isn’t reported as wages or other compensation and is exempt from withholding and payment of employment taxes.

The portion of an allowance that exceeds the substantiated amount, however, must be included in gross income and is treated as paid under a nonaccountable plan. As a result, such amounts are reported as wages or other compensation and subject to employment tax withholding and payment.

Be aware that taxpayers aren’t required to use the method described in the guidance to establish their reimbursed transportation expenses. If you maintain adequate records or other sufficient evidence, you can instead choose to substantiate your actual expense amounts.

The guidance provides additional rules for satisfying the requirements that employees return allowance payments that exceed substantiated amounts. If an employer provides an advance mileage allowance that anticipates more business miles than the employee substantiates, the employee must return a certain portion of the excess, depending on the type of allowance.

FAVR allowances

The revenue procedure also includes guidance on computing fixed and variable rate (FAVR) allowances to establish an employee’s automobile expenses. A FAVR is a mileage allowance that uses a flat rate or stated schedule that combines periodic fixed payments (for items such as depreciation or lease payments, insurance, registration and license fees, and personal property taxes) and variable rate payments (for items such as gasoline and all related taxes, oil, tires, and routine maintenance and repairs).

Employers must base the amount of a FAVR allowance on data that’s derived from the relevant geographic area and reflects retail prices. The data must be reasonable and statistically defensible in approximating the actual expenses an employee would incur as owner of the “standard automobile” (the automobile the payer selects to use as the basis for a specific FAVR allowance).

The guidance provides that the standard automobile cost for a calendar year can’t exceed 95% of the sum of the retail dealer invoice cost for the standard auto in the area and the state and local sales or use taxes on the purchase of the auto. (The IRS publishes the maximum standard auto cost annually.) Its guidance addresses the determination of business use percentage, allowance limitations and the payer’s recordkeeping and reporting obligations.

Effective now

The new IRS guidance is effective for deductible transportation expenses paid or incurred, and mileage allowances or reimbursements paid, on or after November 14, 2019. In addition to business driving expenses, it also addresses the deductible costs of operating a vehicle for charitable, medical or moving purposes. We’d be pleased to answer your questions regarding mileage-rated deductions.