Month: October 2023

Preface: “Entertainment is in the eye of the beholder.” – Anonymous

Meals and Entertainment Deductions for Businesses in Tax Year 2023

Credit: Benjamin Gelbart

For the most part, tax year 2023 sees a continuation of the types of meals and entertainment deductions allowed under the Tax Cuts and Jobs Act of 2017. This means:

I) No deductions are allowed for entertainment expenses.
II) In general, meal expense deductions are limited to 50% of their cost.

The 100% deductions that had been allowed in 2021-2022 for meals purchased in restaurants have now been discontinued. This increased percentage had been introduced as part of the Consolidated Appropriations Act of 2021 to help support the restaurant business during COVID by encouraging businesses to spend more of their meal budgets in restaurants.

The increased percentage still applies to meals that were purchased in restaurants during 2021-2022, but the 50% limit is back in effect for meals purchased in 2023 and going forward.

The only meals that remain 100% deductible for 2023 are:

a) Office holiday parties and picnics.
b) Food offered to the public for free.
c) Meals that have been included as taxable compensation to an employee                 or contractor.
d)Meals sold to a client or customer.

Transportation to and from client business meals is 100% deductible as it is a transportation deduction and not a meal deduction.
The 50% limit applies to:

– Client business meals.
– Meals provided at entertainment or sporting events.
– Meals provided for the convenience of the employer.
– Meals provided to employees occasionally and overtime employee meals.
– Meals during business travel.
– Meals in office during meetings and conferences.
– Meals included in a charitable sports package.

Example: Whether you are entertaining clients, providing a meal for employees during an extended series of meetings, or having a meal on the road while travelling for business, the meal will only be deductible at 50% of its cost regardless of whether you purchase the food at a restaurant or at a convenience or grocery store.

No deduction is available for entertainment, sporting event tickets, or club memberships. However, food and beverages provided during such events are still deductible up to the 50% limit as long as the cost is stated on a bill or receipt separately from the total entertainment cost.

Example: You entertain clients at a sporting event or club at your expense. During the event, food and beverages are provided. If your purchase for the food/beverage cost is stately on a bill or receipt separately from the other costs, you can deduct 50% of that separately stated amount that is due to food and beverages. That is the only business deduction you can take from an event of this type in 2023.

For more information on Meals and Entertainment Deductions for Businesses in Tax Year 2023 please contact our office.

Preface: “An investment in knowledge pays the best interest.” —Benjamin Franklin

The PA EITC Allows Pennsylvanians to Fund Schools and Reduce Taxes

Credit:  Jacob M. Dietz

Many people do not like paying taxes. Some people, however, would joyfully donate to a good school that shared their values. Fortunately, the Pennsylvania Educational Improvement Tax Credit (EITC) allows qualifying businesses to enjoy a 90% tax credit to reduce various PA taxes on eligible donations to qualifying organizations.

The credit offsets PA corporate net income tax, PA personal income tax and various other taxes. For pass-through entities, REV-1123 can be filed to pass the credit down to the partners to claim on their personal tax returns. It does not offset sales tax or payroll taxes. Sole proprietorships do not qualify for the credit.

If your business structure does not qualify, or if you do not wish to give through your business, then you might consider using a special purpose entity (SPE) to make contributions. Faith Builders offers the opportunity to give through an SPE.

To be a qualified member of an SPE, you must be either:
1. An owner or partial owner of a PA business (not a sole proprietorship)
2. A W-2 employee of a PA for-profit business OR
3. A stockholder of a PA registered business.

The donor must give to an approved organization to get the credit. Pennsylvania’s Department of Community and Economic Development lists many organizations that can receive these donations. Faith Builders Scholarship Services is one of these organizations. They pass the donation on to the school of your choice, less an administrative fee. Before choosing a school, however, check with the school to make sure that they are willing to accept the donation.

How much is the credit worth? Generally, EITC donors receive 75% of the contribution as a credit, but it is increased to 90% if you agree to a two-year commitment to give. For Pre-Kindergarten Scholarship organizations, the credit is 100% for the first $10,000, and then 90% above that but not exceeding $200,000.

Let’s look at an example of how this could work. Suppose James and Kevin are both 50% members in Ironville Bicycle Seats, LLC. They ask their CPA what their normal PA personal income tax liabilities are, and he tells them that they both averaged a $3,000 liability for each of the last two years. They decide to estimate their future liabilities on the low side to avoid having an unusable credit. They agree to aim for a $1,800 credit per person each year. They therefore make a 2-year commitment from the LLC to give $4,000 to Faith Builders Scholarship Services, and have the money passed on to their local church school. They fill out the information and give it to Faith Builders, which electronically files the application at the right time. Since it is a 2-year commitment, 90% of the donation, or $3,600 per year, is available as a credit. Their CPA can file REV-1123 to pass an $1,800 credit down to both James and Kevin each year to be used on their personal income tax returns. Their church school doesn’t need to worry about receiving a check from the state because the money received by the school doesn’t come from the state. The money never touched the state’s coffers on its way to fund Christian education.

Now let’s suppose that Kevin and James are still 50% partners, but James wants to take the EITC because he has children in a school that accepts EITC funds, but Kevin does not want to participate since his church school doesn’t accept EITC funds. In that case, James could still apply for the EITC by applying to Faith Builders to join an SPE in his personal name. He could then contribute $3,000 (or more) and get a $2,700 PA tax credit.
If you currently pay personal PA income taxes and already joyfully give to Christian education, then you may want to consider the EITC. The EITC allows Pennsylvanians to give to education while paying less to the government.

This article is general in nature, and does not contain legal advice. Please contact your accountant to see what applies in your specific situation.

Preface: It’s what you learn after you know it all that counts. -John Wooden

2023 Tax Planning: Higher Education Credits

With school back in session, parents and students should look into tax credits that can help with the cost of college education. Credits reduce the amount of tax someone owes on their tax return. If the credit reduces tax to less than zero, the taxpayer may receive a refund.

There are two credits available to help taxpayers offset the costs of college education. The American opportunity tax credit (AOTC) and the lifetime learning credit (LLC) may reduce the amount of income tax owed. Taxpayers who pay for higher education can see these tax savings when they file their tax returns next year.

 The American opportunity tax credit is:

• • • • Worth a maximum benefit up to $2,500 per eligible student.

• • • • Only for the first four years at an eligible college or vocational school.

• • • • For students pursuing a degree or other recognized education credential.

• • • • Partially refundable. This means if the credit brings the amount of tax owed to zero, 40 percent of any remaining amount of the credit, up to $1,000, is refundable.

The lifetime learning credit is:

• • • • Worth a maximum benefit up to $2,000 per tax return, per year, no matter how many students qualify.

• • • • Available for all years of postsecondary education and for courses to acquire or improve job skills.

• • • • Available for an unlimited number of tax years.

To be eligible to claim the American opportunity tax credit, or the lifetime learning credit, a taxpayer or a dependent must receive a Form 1098-T from an eligible educational institution. The credits are subject to income limits: to claim the full amount, income must be below $80,000 for single taxpayers ($160,000 married filing jointly). Taxpayers cannot claim either credit if income exceeds $90,000 ($180,000 married filing jointly).

In general, qualified tuition and related expenses for the education tax credits include tuition and required fees for the enrollment or attendance at eligible post-secondary educational institutions (including colleges, universities and trade schools). The expenses paid during the tax year must be for: an academic period that begins in the same tax year or an academic period that begins in the first three months of the following tax year. For the AOTC but not the LLC, qualified tuition and related expenses include amounts paid for books, supplies and equipment needed for a course of study.

 The following expenses do not qualify for the AOTC or the LLC:

• • • • Room and board

• • • • Transportation

• • • • Insurance

• • • • Medical expenses

• • • • Student fees, unless required as a condition of enrollment or attendance

• • • • Expenses paid with tax-free educational assistance

• • • • Expenses used for any other tax deduction, credit or educational benefit

We wish you a successful school year. Please call our office if you have any questions related to education expenses and tax benefits.

Preface: “You are not buying a house, you are buying a lifestyle.”                        -Anonymous

Interest – Tax Breaks for Home Mortgage Interest

The Trump Administration Tax Cuts and Jobs Act (Tax Cuts Act) placed new restrictions on the home mortgage interest deduction, one of the most important tax breaks available for homeowners today. Because the potential for tax savings is so great, it may be useful to review the rules. As you’ll see, they are quite complex and full of nuances as well as opportunities.

Home acquisition. Like the vast majority of Americans, you generally can fully deduct the interest paid on a loan if the proceeds are used to buy or build a residence (a main home and one vacation home). This type of financing is called acquisition debt; it can’t exceed an aggregate of $1 million for all interest to be deductible, and must be secured by your home.

Under the Tax Cuts Act, a taxpayer may treat no more than $750,000 as acquisition debt ($375,000 in the case of married taxpayers filing separately) for tax years 2018 through 2025. The reduced amounts for acquisition debt do not apply to any debt incurred on or before December 15, 2017. Therefore, a taxpayer who purchased their home on or before December 15, 2017, may continue to deduct interest paid on the first $1 million of debt ($500,000 for a married taxpayer filing a separate return). The acquisition debt incurred on or before December 15, 2017, reduces the $750,000/$375,000 limit to any acquisition debt incurred after December 15, 2017.

Points. In general, any points you pay to the lender in the year you get a mortgage loan to buy your main residence are fully deductible. In order for points to be deductible, they must be paid from funds separate from loan principal at the time of closing. Points paid to refinance a mortgage on a principal residence are generally not deductible in the year paid and must be prorated over the period of the new loan. However, if the borrower uses part of the refinanced mortgage proceeds to improve his or her principal residence, the points attributable to the improvement are deductible in the year paid.

Home equity loans. The Tax Cuts Act suspends the deduction for interest on home equity debt. Therefore, for tax years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity debt. However, home equity loan interest is still deductible in certain circumstances. For example, interest on a home equity loan used to build an addition to an existing home would be deductible if certain requirements are met. The suspension ends for tax years beginning after December 31, 2025.

Refinance. It may be beneficial to refinance acquisition debt for a lower rate of interest (or more favorable terms overall). The ($1million/$500,000) higher dollar limit continues to apply to any debt incurred after December 15, 2017, if it used to refinance existing acquisition debt as long as the refinancing does not exceed the amount of the refinanced debt. Therefore, the maximum dollar amount that may be treated as acquisition debt on the taxpayer’s principal residence will not decrease by reason of a refinancing. The exception for refinancing existing acquisition will not apply after:

1. 1. 1. 1. the expiration of the term of the original debt; or
         2. the earlier of the expiration of the first refinancing of the debt or 30 years after the date of the first refinancing.

Please do not hesitate to give us a call and set up an appointment to analyze your home financing situation in order to make the most of the home mortgage interest deduction.