Arming staff with the right tools to succeed
Q. I’m the managing partner of a small CPA firm who has found managing staff remotely to be a challenge. Do you have any suggestions?
A. For much of the past year, it felt like nothing would ever be normal again. We all stopped going to the office and tried setting up our work machines with our printers at home, hoping to find a few minutes of peace at the kitchen table to get some actual work done. In the 12 months since the COVID–19 pandemic brought everything to a screeching halt, we’ve all had to become skilled and efficient remote workers, even as parts of the economy opened up.
One thing we’ve learned from all of this is just how hard it can be to keep all of your staff on track with the right projects and deliverables at the right time. Sharing incomplete calendars and scheduling too many meetings isn’t going to cut it, especially since so many have committed to working remotely, either part time or full time, for the foreseeable future. Let’s examine which software and management tools work best for a remote–work environment.
A friend of mine had to work on his 10–year–old Dell laptop at home for weeks at the beginning of the pandemic. His employer did not initially provide any hardware to employees when everyone was sent home. Because he wasn’t able to complete his work on his iPad, his only option was the laptop he bought fresh out of college a decade earlier. His boss eventually resolved the issue and had new laptops sent to the team, but this slowed his work to a crawl temporarily.
Maybe your issues aren’t as obvious as this antiquated hardware example, but just about every business has experienced some form of change over the last year. Check in with your team members and make sure everyone can complete all their normal tasks without relying on personal hardware or working extra hours. When done correctly, remote work should help streamline your business, not hurt it.
The right hardware means more than just a computer. Don’t forget about printers, scanners, monitors, desks, port replicators, etc. Check with each person on your team to make sure they have exactly what they need.
Software such as Asana and Monday.com can keep your team on schedule even when you’re not in the same place. Sharing one digital whiteboard can show exactly what everyone is working on and how long they need to be focusing on each task. Honestly, team management software should be in your normal workweek arsenal regardless of location. The hours of stress and miscommunication you save make the upkeep of team management software worthwhile.
When exploring these team management apps, be sure to look for integration with your existing platforms. If one seems tailor–made for Microsoft, but you’re a Google shop, there’s probably a better option out there. Also, don’t forget to check for mobile apps when you’re window–shopping. Many of these are excellent choices for your phone and tablet.
One of the ironies of working remotely and reducing travel is that our calendars are busier than ever. This makes coordinating appointments with people outside of your organization as complicated as the handstand scorpion yoga pose. Fortunately, you can choose from a number of solutions to simplify this process.
Applications such as Calendly, Doodle, and Microsoft Bookings connect to your calendar and allow people to self–schedule with your calendar, based on their availability. Some applications even offer suggestions automatically if both calendars are connected.
For group scheduling, Doodle is the way to go. Coordinating group calendars can be a nearly impossible task, so Doodle resolves this by allowing each member to list his or her availability at predetermined time slots, which allows organizers to select the best slot for the group.
If you’ve moved to any new software over the last year and weren’t able to get together for any formal training sessions, screen–capturing software can help close the knowledge gap. Camtasia and Loom are great options that allow for simultaneous screen and webcam capture. The recording quality will be more than good enough to get everyone started on any new products, offerings, or software you’re using internally or selling to clients, and the recordings can be stored and shared forever.
In addition to team training, these apps can also be a great way to record a brief presentation for clients or customers. If you have physical props to go along with your slideshow, these are perfect for capturing your entire physical and digital presentation.
Trainual is an excellent app that allows you to create training tutorials for everything from client onboarding to training staff on new organizational processes. Features include the ability to track individual completion and even create quizzes. This can give you the peace of mind of knowing that your team is up to date on the latest processes and procedures.
When working in the office, it can be a challenge to manage staff and ensure everyone is receiving regular feedback and coaching about their performance. Sprinkle in a layer of working remotely, and the process can be even more daunting. Thankfully, good applications are readily available for managing staff remotely and in the office.
15five, Culture Amp, and Lattice are great examples of apps that can help teams organize continuous performance feedback. This means you can easily document positive feedback for top performers and provide constructive feedback for anyone who’s struggling.
Remote–monitoring apps have been a hot topic since remote work began, and the debates about them have only increased in the last year. In my opinion, no tracking software on the planet can replace an open and responsible workplace.
Tracking software will automatically put every employee on guard. Your best employees will no longer feel trusted to deliver on the work they’ve been delivering with flying colors in the past. I argue that a worthy manager should be able to spot slacking employees without tracking software.
Productivity will not increase with tracking software. The bad employees will find ways around your monitoring. The good employees will feel offended, leading to a decrease in output and overall morale.
It’s not worth hurting the relationships you’ve built over the years. A good employee doesn’t need a manager standing over his or her shoulder all the time in the office, so why would that be any different remotely? The bottom line is that you should trust your employees, not your tracking software.
What a year it has been. Millions of households have experienced job loss, sickness, and even death. Even with vaccines now being distributed, it will take a long time to get back to any kind of “normal.” There are more important things in life than work. Remembering this will show your employees that you care about them and their loved ones.
Remote work has exploded in popularity and, even after the pandemic is behind us, will still be a part of nearly every business. As such, remote staff management is now a crucial business leadership skill. When applied effectively, it can result in happier and more productive employees. It’s important to know how to manage your team members from across the hall or around the globe.
— By Byron Patrick, CPA/CITP, CGMA
About the author
Byron Patrick, CPA/CITP, CGMA, is vice president of growth and success at Botkeeper.
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Employee retention credit guidance update and rising economic confidence
On March 1, the IRS issued guidance on the employee retention credit. April Walker, CPA, CGMA, lead manager on the Tax Practice & Ethics team at the AICPA, explains the highlights of that guidance, including how the credit interacts with PPP loans. Also, Ken Witt, CPA, CGMA, senior manager for management accounting and member engagement at the AICPA, shares the important details of the latest AICPA Business & Industry Economic Outlook Survey.
What you’ll learn from this episode:
Play the episode below or read the edited transcript:
To comment on this episode or to suggest an idea for another episode, contact Neil Amato, a JofA senior editor, at Neil.Amato@aicpa-cima.com.
Neil Amato: Welcome to the Journal of Accountancy podcast. I’m senior editor Neil Amato. We’re starting this week’s podcast with news on recent IRS guidance on the employee retention credit. April Walker is a CPA and lead manager on the Tax Practice & Ethics team and a colleague of mine at the AICPA. So, to set the scene, April, late on Monday, March 1, 102 pages of guidance was issued by the IRS on employee retention credits. What clarifications did this guidance make for employers with PPP loans?
April Walker: Thanks, Neil. So, the simple answer to that question is that the notice provides an explanation on how and when employers that received PPP loans can go back and retroactively claim the employee retention credit for 2020.
I just want to provide a little bit of background. For 2020, the employee retention credit can be claimed by employers who paid qualified wages from March 12, 2020, until the end of the year, and they’re eligible if they experienced a full or partial shutdown of their operation due to a government order, or they had a significant decline in gross receipts. So, the credit is equal to 50% of qualified wages, up to $5,000 for 2020. So, the significant change and why we’re still talking about this credit — this credit is against payroll tax, it’s not an income tax credit — is because the relief act that was signed in late December lets employers who received a PPP loan, a Paycheck Protection Program loan, to also claim the employee retention credit. The caveat in the legislation was the same wages couldn’t be used for both PPP forgiveness and the employee retention credit.
So, that’s where you had a really, key unanswered question on how you do that allocation. And the answer is they said, “OK, if you’ve already applied for forgiveness, whatever wages you listed on the application, you have elected to use those wages for PPP forgiveness, and you can’t uses those wages for the employee retention credit.” And why that might be an issue for people is that in order to get forgiveness for PPP, you only have to use 60% — 60% of payroll costs have to be used in order to be forgiven for the loan. But for simplification purposes, someone might have put — here’s a simple example. An employer received $100,000 of PPP. On the forgiveness application, they could have put $60,000 of payroll and $40,000 of other qualifying costs if they had them. For simplification, they may have just put $100,000 of payroll cost.
But by doing that, that $100,000 — there’s no way to go back and change that. But at least we have the answer on how to do that. There is more flexibility on people who have not applied for forgiveness yet. Because then you can just take a look at all the qualifying wages, what qualifies for employee retention credit and what qualifies for PPP forgiveness, and make a more strategic determination.
Amato: What else was changed by this guidance?
Walker: So, it was 102 pages of guidance. However, a lot of the pages were FAQs that were already included on the IRS website, so there’s not 102 pages of new information. The primary information was what I just talked about, how to determine wages for if you did receive a PPP loan.
There were a couple of other clarifications. One particular outstanding question that they did address but we still have questions about is whether wages paid to shareholders count as eligible costs. We know that wages paid to related individuals are not included, but we’re not sure about that, so that’s still an outstanding question.
Amato: This notice only deals with 2020 employee retention credits. What should we expect regarding 2021 credits?
Walker: Right, so, as you probably know, there was an extension of the credit to 2021, and the IRS in this notice itself pretty much says, “We’re only dealing with 2020 in this notice. We’re going to deal with 2021 and address those questions.” And that should be coming out soon.
Amato: Definitely more to follow in this story. I know you’ll be keeping up with it, April. Thank you for being on today.
Walker: Happy to be here.
Amato: In other news, U.S. CPA decision-makers are growing more optimistic about their organizations and the domestic and global economy. After the onset of COVID-19 about a year ago, sentiment in the Business and Industry Economic Outlook Survey by the AICPA dropped from the mid-70s on a 100-point scale to the high 30s between the first and second quarters of 2020.
In the most recent results, released March 4, that sentiment is back close to pre-pandemic levels, at 68 in the CPA Outlook Index. For more on the results, here’s my conversation with the AICPA’s Ken Witt, a senior manager for management accounting and member engagement.
Another quarter, which means another quarterly Business and Industry Economic Outlook Survey is in the books. Here to talk about those results is Ken Witt. Ken, thank you for being on. Tell me what to you are kind of the top highlights of this quarter’s survey.
Ken Witt: Thanks, Neil, good to be with you as always. And I think a couple of things. I think just the overall optimism and the increase in sentiment about the economy and people’s organizations, especially how that’s translating into sectors that have had more difficulty during the pandemic and the impact on hiring. I think overall a pretty guarded yet optimistic outlook going forward.
Amato: Yeah, so it’s three straight quarters that there’s been an increase. Obviously, there was a major disruptive event that wasn’t just one quarter but many parts of the year and still affecting us, but what does the rising optimism tell you about the economy in general and I guess hiring in particular?
Witt: In general — of course, both optimists and pessimists cited the change in administration as a factor in the responses they provided. Among the optimists, it was sort of the rolling out of the vaccinations and the impact on the economy that really was noteworthy. So, I think it’s a positive step forward. I think people are beginning to see a little light at the end of the tunnel.
Amato: So, some sectors that were especially hit hard — hospitality and then also retail in some sense — how are those responding this quarter compared with the last quarter and also maybe compared to this time a year ago?
Witt: I think retail is a big one. Retail optimism had increased in the fourth quarter. It was 42% of our retail execs were optimistic in the fourth quarter, and that’s now up to 63%. They were projecting a decline in hiring going forward, which we always see in the fourth quarter, you know, if retailers have a concern about what things are going to look like after they get through the Christmas busy season. We’re actually seeing they top the charts in terms of protecting employment at 3.8% versus a decline in the fourth quarter. So, retail is strong, hospitality/food services, and mining, oil and gas, the extractive sector had both shown negatives going forward from the fourth quarter, and they’re showing positive employment looking ahead from the first quarter.
Amato: You mentioned cautious optimism. Obviously, there are challenges ahead. On the list that respondents are polled on each quarter, what are the top challenges, what stands out to you?
Witt: Yeah, well, I think this is one of those ironic situations where the list of challenges actually presents some good news, too, because what we’re seeing this quarter is that, based on the challenges, that we’re kind of back to business as usual. Obviously, we’re not out of the woods yet, so domestic economic conditions still top the list, but availability of skilled personnel has found its way back to the No. 2 slot. Employee and benefit costs moved up four slots to No. 5, and staff turnover found its way back into the top 10 at No. 9. So, when we have those employment-related challenges showing up on our top challenges for business, I think that there’s some good news in the bad news.
Amato: Ken, anything else to add in closing on this quarter’s survey?
Witt: I think the construction industry is a bit of a mixed bag. Employment is now projected to increase, where it was flat in the fourth quarter, but optimism has eased off a little bit. I think commercial construction in particular with people downsizing their workforces and doing so much work from home, there are some big changes I think in the commercial sector. And there’s also been some challenges in residential construction, both good and bad, so it will be interesting to see how that evolves going forward.
Amato: Ken, thank you very much.
Witt: You’re welcome, Neil. Good to be with you.
Amato: For more information on the Economic Outlook Survey, visit journalofaccountancy.com and type “economic outlook” into the search bar.
Also, look for more coverage related to the $1.9 trillion stimulus bill that is working its way through Congress. The bill, passed initially by the House of Representatives on Feb. 27, contains new tax provisions, aid for small businesses, and relief for state and local governments. For the latest on the bill, visit journalofaccoutancy.com. Thanks for listening to the JofA podcast.
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AICPA requests tax deadline postponements until June 15
The AICPA on Thursday sent a letter to IRS Commissioner Charles Rettig and Acting Assistant Secretary Mark Mazur urgently asking for the deadlines for filing all 2020 federal income tax and information returns and for making payments to be extended from April 15 to June 15, 2021, in response to a number of issues that make it impossible for many taxpayers to meet the April 15 deadline. The letter follows up on the AICPA’s earlier request for tax deadline certainty.
Among the many reasons the AICPA stated that a postponement is needed are the delay of the start of the filing season until Feb. 12, a second round of Paycheck Protection Program loans, and changes to the employee retention credit. In addition, continued stay-at-home orders make it difficult to access taxpayer data, particularly among certain populations such as the elderly, and the IRS continues to be short of staff due to the COVID-19 pandemic.
In the letter, the AICPA “urgently request[s] that the 2020 Federal income tax, information returns, and payments (e.g., extension and estimated payments) originally due April 15, 2021 be granted additional time to file and pay until June 15, 2021.”
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.
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Will states be able to extend their tax filing seasons?
While many state taxpayers are hoping for more time to file their returns, budget shortfalls in some states may prevent extensions beyond June 30 this year even if the IRS pushes back the federal deadline as it did last year, according to Eileen Sherr, CPA, CGMA, M.T., director–Tax Policy & Advocacy at the AICPA.
Last year, 41 states that have a personal income tax postponed their April 15 filing and payment deadlines due to the fallout from the pandemic.
“This year may be different,” Sherr said. “A lot of states are doing better than they expected, but COVID has hit some states worse than others. They aren’t in as good a revenue situation. Because most states have balanced budget laws, they will want to see tax revenue in this fiscal year, which for most states ends June 30. Depending on how far out the IRS pushes the April 15 date, some states may not be able to follow that.”
Discussion of a possible extension is being driven by the continuing challenges of the pandemic.
“With the pandemic, because of social distancing and other restrictions, people haven’t been able to meet [with their tax return preparers], especially some elderly people who are less adept with electronic means,” she said.
An additional issue regarding state filing is that about half of all states require business entities to file returns on the same day federal returns are due. In those states, taxpayers and practitioners have needed more time after filing federal returns to prepare complete and accurate state returns, Sherr said.
If there is not extra time for filing state returns after the federal return is filed, many taxpayers will need to file state tax extensions, and if there is not extra time for state filing after federal filing at the extended due date, taxpayers may need to file state returns using estimates and then be forced to amend them, creating work for themselves and tax practitioners and more burdens on already stressed revenue departments. The need for more time to file the state return after the federal return is filed is especially vital for businesses operating in more than one state, according to Sherr, because a CPA firm must often do extra calculations for allocation and apportionment in states where the client does business. To assist state CPA societies in advocating for an additional month of state filing after federal filing, the AICPA has offered them model legislative language.
So far, regarding the federal April 15 deadline, the IRS has only granted a June 15 filing extension to Texas residents due to that state’s winter storm power outages.
On Feb. 23, the AICPA, citing the “severe challenges” caused by the pandemic, called on IRS Commissioner Charles Rettig to quickly announce clarity regarding moving the April 15 deadline this year. If the Service does decide to move the deadline, the Institute suggested a nationwide extension to June 15. Similarly, Democrats on the House Ways and Means Committee, which writes tax legislation, asked the IRS on Feb. 18 to quickly consider and announce an extension of the April 15 deadline. The IRS already faces staggering processing delays, according to a report by the U.S. Government Accountability Office issued Monday.
A possible deadline for an IRS announcement may be March 14. That is the date by which the $1.9 trillion American Rescue Plan Act of 2021, H.R. 1319, must become law or federal enhancements to states’ unemployment benefits will lapse. The House passed the package on Feb. 27, and it is now pending before the Senate. “Commissioner Rettig has said that if Congress passes more economic impact payments, the IRS may not be able to meet the April 15 deadline, if it has new responsibilities,” Sherr said.
The sooner the IRS announces an extension, the more time states will have to adjust their policies and deadlines. Last year, in some states, revenue departments issued new guidance, but in others, legislation had to be passed. “I was amazed at how quickly some states came out with their guidance, but other states need more time,” Sherr said. New Jersey last year took until the day before April 15 to pass its legislation that revised the due date.
The decision in 2020 by the IRS and many states to allow e-signatures on a temporary basis marked one positive development amid pandemic-related tax woes. “The AICPA had been wanting the IRS to allow that for years, and the pandemic situation helped make that happen,” Sherr said. The AICPA’s recent letter to the IRS asked it to extend permission to use e-signatures, a step she said the AICPA has also suggested that state societies advocate for states to adopt, and many states have provided e-signature pandemic guidance.
For more news and reporting on the coronavirus and how CPAs can handle challenges related to the outbreak, visit the JofA’s coronavirus resources page or subscribe to our email alerts for breaking PPP news.
— George Spencer is a freelance writer based in North Carolina. To comment on this article or to suggest an idea for another article, contact Chris Baysden, a JofA associate director, at Chris.Baysden@aicpa-cima.com.
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IRS issues employee retention credit guidance
In Notice 2021-20, the IRS issued detailed guidance for employers claiming the employee retention credit for calendar quarters in 2020. The credit was created by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L 116-136, and amended by the Consolidated Appropriations Act, 2021, P.L 116-260. The IRS says the guidance in the notice is similar to the information it posted in FAQs last year, but the notice clarifies and describes retroactive changes under the new law that apply to 2020, primarily relating to expanded eligibility for the credit for taxpayers who took Paycheck Protection Program (PPP) loans. The AICPA requested authoritative guidance on the 2020 and 2021 employee retention credits from the IRS in a comment letter sent on Feb. 25.
For 2020, the employee retention credit can be claimed by employers who paid qualified wages after March 12, 2020, and before Jan. 1, 2021, and who experienced a full or partial suspension of their operations or a significant decline in gross receipts. The credit is equal to 50% of qualified wages paid, including qualified health plan expenses, up to $10,000 per employee in 2020, meaning the maximum credit available for each employee is $5,000.
For 2020, eligible employers that received a PPP loan are permitted to claim the employee retention credit, although the same wages cannot be counted for both. Notice 2021-20 explains in detail when and how employers that received a PPP loan can claim the employee retention credit for 2020. In January, the AICPA requested clarification from the IRS on this topic and recommended that the filing of a PPP loan forgiveness application should not constitute an election to forgo the employee retention credit with respect to the amount of wages reported on the application exceeding the amount of wages necessary for loan forgiveness.
The notice explains (1) who are eligible employers; (2) what constitutes full or partial suspension of trade or business operations; (3) what is a significant decline in gross receipts; (4) what is the maximum amount of an eligible employer’s employee retention credit; (5) qualified wages; (6) how an eligible employer claims the employee retention credit; and (7) how an eligible employer substantiates the claim for the credit.
Although the Consolidated Appropriations Act, 2021, also extended and modified the credit for the first two calendar quarters in 2021, the IRS says this notice addresses only the 2020 rules and that it plans to release additional guidance soon, addressing the 2021 changes.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.
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Dropping the curtain on entertainment deductions
The law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, significantly changed Sec. 274(a) by eliminating any deduction of expenses considered entertainment, amusement, or recreation. The TCJA also extended the 50% deduction limitation for expenses related to food and beverages to those provided by employers to employees in some instances.
Because the changes were unclear on whether food and beverage expenses could be deducted when combined with entertainment expenses, the IRS provided transition guidance through Notice 2018-76 and later through proposed regulations under Sec. 274 (REG-100814-19). In October 2020, the IRS issued final Regs. Secs. 1.274-11 and 1.274-12 (T.D. 9925). But then, at the end of 2020, Congress changed the rules yet again to temporarily allow a 100% deduction for certain business meals (see the sidebar, “On the Menu: A Temporary Full Deduction”).
Regs. Sec. 1.274-11 disallows a deduction for entertainment, amusement, or recreation expenditures paid or incurred after Dec. 31, 2017. An objective test that considers the taxpayer’s trade or business is used to determine whether an activity is entertainment. Any expenditure that is considered entertainment or in connection with an entertainment activity, including for a facility used in connection with an entertainment activity, is not deductible. Dues or fees to any social, athletic, or sporting club, or to any organization that has connections to such facilities, are nondeductible. In addition, no deductions are allowed for amounts paid for membership in any club organized for business, pleasure, recreation, or other social purpose.
However, under Regs. Sec. 1.274-11, entertainment does not include expenditures for food and beverages, as long as they are purchased separately from the entertainment or their cost is stated separately from that of the entertainment on bills, invoices, or receipts. If the food or beverages are not purchased separately from the entertainment, or their cost is not reasonably allocated on the invoice separately from the cost of entertainment, then the entire amount is nondeductible.
Example 1: Taxpayer X invites Y, a business associate, to a college basketball game to discuss business, and X purchases the tickets for them both. In addition, Taxpayer X buys Y dinner in the alumni tent before the game. The dinner is purchased separately from the cost of the tickets. The cost of the tickets is nondeductible entertainment. However, the cost of the dinner is not considered entertainment and is therefore deductible, but it is subject to the 50% limit under Sec. 162 and Regs. Sec. 1.274-12.
Example 2: Taxpayer X invites Y, a business associate, to a college basketball game and purchases two tickets for them to attend the game in a suite in the college’s arena, which includes the cost of all food and beverages. The cost of the tickets is considered entertainment under Regs. Sec. 1.274-11(b)(1) and is not deductible. Likewise, since the food and beverages are not purchased separately from the tickets, their cost is also considered entertainment and nondeductible under Sec. 274(a)(1) and Regs. Sec. 1.274-11.
Example 3: Assume the same facts as in Example 2, except that the invoice X received separates the cost of the tickets from the cost of the food and beverages. Similarly to Example 2, the cost of the tickets is deemed to be nondeductible entertainment. However, the cost of the food and beverages, at the usual price charged by the college’s concession stand if purchased separately, are not deemed to be entertainment expenditures disallowed under Regs. Sec. 1.274-11(b)(1); therefore, X may deduct 50% of the cost of the food and beverages if the expenses meet the Sec. 162 and Regs. Sec. 1.274-12 requirements.
Regs. Sec. 1.274-12 describes the limitation on deductions for certain food or beverage expenses paid or incurred after Dec. 31, 2017. The regulations do not change the provisions relating to the deductibility of business meals. Thus, taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business (again, apart from the new 100% deduction for food and beverages provided by a restaurant in 2021 and 2022), including meals consumed by employees on work travel (H.R. Rep’t No. 115-466, at 407 (2017)). However, as before the TCJA, no deduction is allowed for the expense of any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished (Sec. 274(k)).
Regs. Sec. 1.274-12(a)(3) provides examples of deductible costs of meals provided to business clients and employees in restaurant lunches and during business meetings at a hotel.
Regs. Sec. 1.274-12 also incorporates the substantiation requirements in Sec. 274(d) for expenses of food or beverages paid or incurred while traveling away from home in pursuit of a trade or business and the limitations of Sec. 274(m)(3) for food and beverage expenses of spouses, dependents, or other individuals accompanying the taxpayer or officers or employees of the taxpayer on business travel.
Food or beverage expenses paid or incurred by a taxpayer for a recreational, social, or similar activity primarily for the benefit of the taxpayer’s employees are not subject to the 50% deduction limitation under Regs. Sec. 1.274-12(c)(2)(iii). This exception does not apply if the employee is highly compensated or if an employee (and/or a member of the employee’s family) owns a 10% or greater interest in the taxpayer’s trade or business. Any expense for food or beverages made under circumstances that discriminate in favor of highly compensated employees is not considered to be made primarily for the benefit of employees.
Example 4: Employer R holds a holiday party with a buffet dinner and open bar for all R‘s employees at a hotel ballroom. R may deduct 100% of the cost of the party.
However, snacks available to employees in a break room are subject to the 50% deduction limitation because this is not a recreational, social, or similar activity, “even if some socializing related to the food and beverages provided occurs” (Regs. Sec. 1.274-12(c)(2)(iii), Example (3)).
Before the TCJA, expenses for food or beverages that were excludable from employee income under Sec. 274(n)(2)(B) as Sec. 132(e) de minimis fringe benefits were not subject to the 50% deduction limitation and could be fully deducted. The TCJA repealed Sec. 274(n)(2)(B), so these food and beverage expenses are now subject to the 50% deduction limitation.
The TCJA eliminated the Sec. 274(a) deduction for expenses related to business entertainment, amusement, or recreational activities. These final regulations bring clarity for the business community on what food and beverage expenses are deductible that can be separated from entertainment, amusement, or recreational activities.
Click here to see how well you know what meals remain deductible and how they may be distinguished from nondeductible entertainment.
On the menu: A temporary full deduction
The Consolidated Appropriations Act, 2021, P.L. 116-260, temporarily provided a 100% business expense deduction (rather than 50%) for the cost of food or beverages provided by a restaurant, for expenses paid or incurred after Dec. 31, 2020, and before Jan. 1, 2023 (Sec. 274(n)(2)(D), added by Division EE, Taxpayer Certainty and Disaster Tax Relief Act of 2020, §210).
C. Andrew Lafond, CPA, DBA, and Tom Adams, CPA, CGMA, Ph.D., are an associate and an assistant professor, respectively, at La Salle University in Philadelphia. To comment on this article or to suggest an idea for another article, contact Paul Bonner, a JofA senior editor, at Paul.Bonner@aicpa-cima.com.
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