Tax and financial advice from the Silicon Valley expert.

What meals, entertainment and business gifts are 100% deductible?

The deductibility for meals, entertainment and business gifts is a complex area of the federal tax laws that is worth studying.  I am going to highlight some areas where these items are 100% deductible to stimulate further conversation with your tax advisor.  This is not a complete explanation that you can rely on as authority for a tax position.

The basic rule is that certain business meals and entertainment are 50% deductible.  Business gifts are deductible up to $25 to a person (spouses are counted as one person) per year.

There are important exceptions that should be separately accounted for on a business’s books and records.

For example, food and beverages provided on the business premises of the employer for the convenience of the employer as a de minimus fringe benefit are 100% tax deductible.  This is the “company cafeteria” exception.

Recreational or social expenses primarily for the benefit of employees other than highly compensated employees, such as company picnics and holiday parties, are 100% tax deductible.

When a taxpayer is in the business of providing meals and entertainment to customers, such as amusement parks, restaurants and nightclubs, the expenses of providing those goods and services are 100% tax deductible.

An important exception that I want to focus on is expenses for goods, services and facilities made available by the taxpayer to the general public.  This article was inspired by private IRS letter ruling 9641005, which explains how the limitations apply for a casino.  IRS private letter rulings can’t be relied on as authority for tax positions, but indicate the thinking of the IRS for this situation.

In that ruling, the term “general public” is very broadly interpreted to include a customer or group of customers.  (It may be that casinos as a group have enough political “pull” to get a generous interpretation by the IRS.)

Most of the gaming operations, shows, and restaurant facilities in the casino are providing meals, entertainment and lodging to the general public, and so the expenses of providing them are tax deductible as cost of goods and services sold.

Casinos provide a number of gifts to customers intended to stimulate additional business, called “comps.”

When a casino provides food, drinks and show tickets on its premises as comps to guests who are gambling or lodging on the premises, they are providing tax deductible “samples” to the public, which are 100% tax deductible.

Some promotional gifts given to customers may be fully tax deductible.  An example from the Congressional Committee report is cited that if the owner of a hardware store advertises that tickets to a baseball game will be provided to the first 50 people who visit the store on a particular date, or who purchase an item from the store during a sale (gift with purchase), the total cost of the tickets is tax deductible as a business promotion expense.  Casinos commonly give coupon books to their guests and may deduct 100% of the expenses for the coupon items.

Items, such as promotional pens, that cost up to $4.00 with the taxpayer’s name imprinted for which multiple identical items are given are not considered to be business gifts, but simply fully tax-deductible promotional items.

Dinner meetings for groups of customers or prospective customers relating to a business presentation, as we commonly see for financial planners, are 100% tax deductible “public events.”

Things become more involved for comps provided by casinos for activities off their business premises.

For example, sporting event tickets (unless relating to a business promotion) are only deductible for their face value, and may be either deducted as entertainment expenses subject to the 50% limit or as gifts subject to the $25 annual limit per customer.

Meals or other entertainment provided off the premises might be 50% deductible if a representative of the casino accompanies the customer for a business deduction.  Otherwise, reimbursements provided to the customer or direct payment by the casino aren’t tax deductible.

Some business expenses that would otherwise be entertainment are classified differently in certain situations.  For example, professional theater critics may fully deduct theater tickets for shows they review, and fashion shows by clothing manufacturers are fully deductible promotional events.

Note the $25 and $4 limitations above are very old, going back to 1954.  This is a good time to write your representatives in Congress that these limitations should be increased or eliminated.

Now is a great time to review your accounting procedures with your tax advisor to assure you are maximizing your tax deductions.  If you need our assistance in that effort, please call Dawn Siemer at 408-918-3162 weekday mornings to make an appointment.

A Social Security benefit when both spouses were at least age 62 on 1/1/2016

Under a grandfather rule, married couples who were both at least age 62 on January 1, 2016 are eligible for a procedure called a “restricted application” to increase their Social Security benefits.  The spouses must also meet other qualifications for spousal benefits to use the procedure, which I’m not going to explain here.

The Social Security benefit increases by 8% each year after the individual reaches “full retirement age” until reaching age 70, usually for a total potential 32% increase.  (For individuals born from 1945 to 1954, full retirement age is age 66.)

If you are trying to provide the highest possible survivor benefit, you will usually want to defer applying for benefits for the higher-earning spouse until age 70.

Lower-earning spouses can always apply for worker benefits under their own account and later apply for potentially higher spousal benefits after their higher-earning spouses apply for benefits under their own account.

When a restricted application is made, the higher-earning spouse initially applies only for spousal benefits under the lower-earning spouse’s account.  Retirement credits continue to accrue on the higher-earning spouse’s account and that spouse applies for worker benefits on his or her own account at age 70.

For example, John was born on April 8, 1953.  His full retirement age benefit at age 66 is $2,500 per month.  Jill was born on December 30, 1952.  Her full retirement age benefit at age 66 is $800 per month.

Jill applies for worker benefits at age 66 on December 30, 2018.  Her benefit is $800 per month.

John makes a restricted application for spousal benefits at age 66 on April 8, 2019, for a benefit of $400 per month (disregarding cost of living adjustments for all computations.)

John applies for worker benefits on his own account at age 70 on April 8, 2023, for a benefit of $3,300 per month.

Jill applies for spousal benefits during April 2023 for a benefit of $1,250 per month (one-half of John’s primary insurance amount of $2,500).

You can’t apply for spousal benefits until your spouse applies for worker benefits.

When the low-income spouse applies for spousal benefits after reaching full retirement age, that spouse receives one-half of the high-income spouse’s primary insurance amount (the worker benefit that spouse would receive at full retirement age without any increases for deferred retirement credits), even if the high-income spouse hasn’t reached full retirement age, and even when the high-income spouse applies for benefits later than full retirement age.

This explanation only covers the highlights.  You might want to go over your details with a financial planner who understands Social Security benefit planning.

Also, be extra careful when making a restricted application for benefits to avoid accidentally making a regular application.

I hope this information is helpful for you or somebody that you know.  Feel free to share a link for this blog post.

Are you a winner or loser under tax reform?

Many Americans are probably wondering whether they will pay more or less taxes under proposals released by President Trump and the tax-writing committees of Congress.

If you listen to President Trump’s sales presentations for the plan, everyone will be better off, but it ain’t necessarily so.

The proposals are still rather sketchy.  The taxable income amounts for which the various tax brackets will apply haven’t even been announced.  Here is my speculation about who are some of the winners and who are some of the losers under the proposals.  Since a combination of factors may apply, each family will need their own computations of tax before and after the changes when the details of the plan are ultimately released if Congress is successful in passing tax reform legislation.

Winners

U.S. corporations with accumulated earnings “parked” offshore.  U.S. multinational corporations haven’t brought their cash from offshore subsidiaries to the U.S. to avoid having them taxed.  Under the tax proposal, they would be able to repatriate the cash at low tax rates, payable over up to five years.  This could make the cash available to pay as dividends to U.S. shareholders to make investments in the U.S.  It could also be just a transfer from a foreign bank to a U.S. bank.

U.S. multinational corporations.  Under the proposal, dividends paid to U.S. corporations from offshore subsidiaries that are at least 10% owned by the U.S. corporation would be tax exempt.  U.S. corporations would no longer be subject to tax on their worldwide income, but only their U.S. operations.

U.S. business owners.  The maximum corporate tax rate would be reduced from 38% to 20%.  The maximum tax rate for individuals on business income would be reduced from 39.6% to 25%.  Investments in depreciable assets (equipment) other than structures (buildings) would be currently deductible for at least five years.

Employees with incentive stock options.  The exercise of incentive stock options isn’t subject to the regular tax, but is currently taxable under the alternative minimum tax.  Since the alternative minimum tax would be repealed, the exercise of incentive stock options would be deferred until the stock is sold or there is another disqualified disposition.  The original tax benefit of incentive stock options would be restored.

Healthy retired empty nesters.  Many of these taxpayers already use the standard deduction.  Their standard deductions will increase under the tax proposals, likely resulting in a tax reduction.

Very wealthy families.  The federal estate tax would be repealed.  Very few Americans are currently subject to the federal estate tax at death.  The exemption equivalent for 2017 is $5.49 million per individual, or nearly $11 million for a married couple.  The federal estate tax rate is 40% for the excess.  (Note there is no proposal to repeal the federal gift tax!)

High income individuals.  The maximum income tax rate would be reduced from 39.6% to 35%.  The additional 3.8% tax on net investment income is also proposed to be repealed.

Losers

Very large families.  The personal exemption would be repealed.  The rationale is the larger standard deduction would cover the elimination of the personal exemption, but it is a flat amount.  The dependent exemption for 2017 is $4,050.  With the $12,700 standard deduction for married couples for 2017, a family of three would have a combined deduction of $24,850 — exceeding the proposed standard deduction for married couples of $24,000.

Single parent families.  It appears the head of household filing status, a very significant tax break for single parent families, would be eliminated.

People who live in states with high income taxes.  States with high income tax brackets include California, New York, New Jersey, Minnesota and others.  (Note many of them are “blue” states.)  The deduction for state income taxes would be repealed.

People who pay high real estate taxes.  The deduction for real estate taxes would be repealed, eliminating a significant tax benefit of home ownership.

People in nursing homes.  Since the medical deduction would be eliminated, people who are uninsured or underinsured and pay for long-term care will lose a signficant tax benefit.  (For many of them, their medical expenses eliminates most of their taxable income.)

Employees with employee business expenses.  Employee business expenses are an itemized deduction that would be repealed.

Corporations that issue bonds or borrow money.  The deduction for interest expense for C corporations would be partially limited.

People who pay high legal fees.  Some legal fees now qualify to be deducted as miscellaneous itemized deductions.  This deduction would be repealed.

People who have high investment management expenses.  Investment management expenses for taxable investments are miscellaneous itemized deductions.  This deduction would be repealed.

Tax return preparers.  Actually, pluses and minuses.  Taxpayers will be totally confused by the tax law changes and will seek help in sorting them out.  Many tax returns will be simpler to prepare, resulting in lower fees.  Tax professionals will need to approach planning more from a financial planning point of view.  Tax return preparers who serve high net worth clients will still have plenty of business.  These clients will still have complex tax issues to deal with

Let your representatives in Congress know what you think about these proposals.  Here is a web site with contact information:  https://www.usa.gov/elected-officials

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How can a business valuation specialist save taxes for your business or family?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Thursday, August 24, is with James Brown, ASA, CFP(R) of Perisho, Tombor & Brown.   Our interview subject is “The role of the business valuation specialist.”  The interview will be broadcast at 6:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. Note the change in day and time.  You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

After eight years of production, this is the final broadcast of a new interview for Financial Insider Weekly.  Thank you to the public access television stations that broadcast the show and to the viewers for watching it.  You will find a wealth of financial information under past episodes at www.financialinsiderweekly.com.

How should you prepare to sell a business?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Friday, August 11, is with Greg Carpenter of BTI Group Mergers & Acquisitions.   Our interview subject is “Preparing to sell a  business.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What should you know when buying a business?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Friday, August 4, is with Greg Carpenter of BTI Group Mergers & Acquisitions.   Our interview subject is “Buying a business.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What tax rules apply to the sale of a principal residence?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Friday, July 28, is with G. Scott Haislet, CPA and attorney at law.   Our interview subject is “Sale of a principal residence.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What should you know about California real estate change of ownership?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Friday, July 21, is with G. Scott Haislet, CPA and attorney at law.   Our interview subject is “Real estate reassessment change of ownership in California.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

How can you save income taxes with a tax-deferred Section 1031 exchange?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Fridays, July 7 and 14, is with G. Scott Haislet, CPA and attorney at law.   Our interview subject is “Section 1031 exchanges.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

What life insurance basics should you know?

The interview on Financial Insider Weekly to be broadcast in San Jose and Campbell  on Fridays, June 23 and 30, is with Peggy Martin, CLU, ChFC of The Family Wealth Consulting Group.   Our interview subject is “Life insurance basics.”  The interview will be broadcast at 9:30 p.m. Pacific Time on CreaTV, Comcast Channel 15 in San Jose and Campbell, and will be broadcast as streaming video at the same time at www.creatvsj.org. You can find broadcast times for other San Francisco Bay Area cities and past episodes at www.financialinsiderweekly.com.

Tax and financial advice from the Silicon Valley expert.