by Thomas A. Gorczynski

The deductible amount permitted for a business’s food and beverage expenses can be confusing. In general, 50% of the expenses are deductible under §274(n)(1) unless an exception under §274(n)(2) applies that permits 100% of the expenses to be deductible. However, if the food and beverage expense is inextricably bundled with an entertainment expense, it may be nondeductible under §274(a)(1).

Below are typical business food and beverage expenses and the amount the business can deduct. The examples (and the result) come directly from Treasury Regulations.

Client Lunch

Aaron takes his client Bubba out to lunch and spends $60. How much of the $60 is deductible?

50% of the food and beverage expenses are deductible, totaling $30. See Treas. Reg. §1.274-12(a)(3)(i).

Employee Lunch

Carla takes her employee Derek out to lunch and spends $70. How much of the $70 is deductible?

50% of the food and beverage expenses are deductible, totaling $35. See Treas. Reg. §1.274-12(a)(3)(ii).

Hotel Business Meeting

Eric holds a business meeting at a hotel, during which food and beverages are provided to attendees. He spends $250 on facility charges and $600 on food and beverages. How much of the $850 is deductible?

The total deductible expenses are $250 for the facility charges and $300 for 50% of the food and beverage expenses, totaling $550. See Treas. Reg. §1.274-12(a)(3)(iii).

Basic Sporting Event

Adrienne invited Barbara, a major vendor of her business, to a baseball game to discuss a proposed business deal. Adrienne spent $100 on tickets and $50 on food and beverages during the game. How much of the $150 is deductible?

The ticket cost is a nondeductible entertainment expense, and 50% of the food and beverage expense is deductible, totaling $25. See Treas. Reg. §1.274-11(d)(1), (2).

Fancy Sporting Event

Carlita invited Daniel, a significant business customer, to a basketball game to discuss a new business line she is offering. She purchased suite tickets to the game, where they can access food and beverages. The cost of the suite tickets was $500, including the food and beverages, and the amount allocated to the food and beverages was not separately stated. How much of the $500 is deductible?

The entire ticket cost is a nondeductible entertainment expense because there is no separate statement of the food and beverage costs. See Treas. Reg. §1.274-11(d)(3).

Travel Meals

Frances, a sole proprietor, and her spouse, Susan, travel from New York to Boston to attend a series of business meetings related to her business. Susan is not an employee of the business and does not travel to Boston for business purposes.

While in Boston, Frances and Susan go out to dinner. They spend $200 on food and beverages, with the costs equally divided. How much of the $200 is deductible?

Susan’s meal expenses are nondeductible, while 50% of Frances’s meal expenses are deductible, totaling $50. See Treas. Reg. §1.274-12(a)(4)(iii)(D)(1).

In today’s digital age, protecting your personal information is more crucial than ever, especially during tax season. One of the most effective tools offered by the IRS to safeguard taxpayers against identity theft is the Identity Protection PIN (IP PIN). This six-digit code, unique to each individual, helps prevent thieves from using your Social Security Number to file a fraudulent tax return in your name.

What Is an IP PIN?

The IP PIN is a six-digit number that the IRS assigns to a taxpayer to protect their tax return from identity theft. If you have an IP PIN, the IRS will use it to verify your identity for your tax return, ensuring that no one else can file using your Social Security Number (SSN).

Without an IP PIN, a fraudster could attempt to submit a return with your SSN, which could lead to delayed refunds and a complex process to rectify the situation. Once the IP PIN is in place, even if a criminal obtains your SSN, they won’t be able to file a valid tax return without that specific IP PIN.

Who Should Consider Getting an IP PIN?

Initially, the IRS provided IP PINs only to taxpayers who had experienced identity theft. However, recognizing the importance of proactive security, the IRS now allows any taxpayer who can verify their identity to apply for an IP PIN. This means that if you want extra security for your tax information, you can choose to get an IP PIN, regardless of any past identity theft incidents.

Those most likely to benefit from an IP PIN include:

• Individuals with a history of identity theft or data breaches
• People with significant public profiles who may be targeted for financial scams
• Anyone looking for an added layer of protection to secure their tax information

How to Obtain Your IP PIN

1. Visit the IRS IP PIN Application Page: Go to the official IRS website’s IP PIN application page here to start the process.
2. Create an IRS Account: You will need to set up an IRS account if you don’t already have one. Be prepared to verify your identity by providing your SSN or Individual Taxpayer Identification Number (ITIN), a recent tax return, and financial account information. The IRS uses multi-factor authentication for added security.
3. Complete Verification: Follow the steps outlined on the site to verify your identity and obtain your IP PIN. The process typically takes only a few minutes.
4. Renew Annually: The IP PIN is valid for one year. Each year, you’ll receive a new IP PIN, which ensures that your account remains secure.

Tips for Safeguarding Your IP PIN

Once you have your IP PIN, it’s essential to keep it safe:

• Store it securely: Only keep it in places where it won’t be accessible to others.
• Do not share your IP PIN: The IRS will never ask for your IP PIN via phone, email, or text.
• Monitor your IRS account: Regularly review your tax transcripts and IRS account for any unauthorized activity.

Benefits of an IP PIN Beyond Identity Protection

In addition to preventing fraud, obtaining an IP PIN can streamline tax processing by minimizing the need for identity verification. If the IRS receives a return without your unique IP PIN, they’ll automatically reject it, which helps reduce the likelihood of errors or misfiled returns.

A Proactive Step Toward Peace of Mind

Taxpayers across the country have successfully used the IP PIN as an additional shield against fraud and identity theft. Taking a proactive approach to your tax security is one of the best decisions you can make during tax season. To learn more about the IP PIN and start the process, visit the IRS IP PIN page today.

Do you operate your business as an S or a C corporation? Do you drive a vehicle titled in your personal name for corporate business? Beware. The Tax Cuts and Jobs Act (TCJA) changed the rules for tax years 2018-2025.

Before the TCJA, you had to pay attention to the use of your personal vehicle for corporate business in order to avoid losing deductions to the 2 percent miscellaneous
itemized deduction rule and the alternative minimum tax.

But now, because of the TCJA, you face a narrow road during tax years 2018-2025 if you want tax benefits for the corporate business use of your personal vehicle.

Big Picture

1. The personal vehicle used for corporate business is a business vehicle to the extent of corporate use.
2. If you don’t want to lose your rightful tax benefits from your business use, your corporation must reimburse you for your business use.
3. Your corporation may reimburse you using the IRS standard mileage rate or actual expenses.
4. When you trade in or sell the vehicle you used for corporate business, you will report a taxable gain or claim a deductible loss on IRS Form 4797.
5. To obtain your reimbursements from your corporation, you submit expense reports under the accountable plan rules.

Make Sure to Do This

You need a mileage log. The mileage log defines the dollar amount of the corporate reimbursement—regardless of whether you seek reimbursement using (a) actual
expenses or (b) the IRS mileage method. The mileage log saves you in an IRS audit.

Accountable Plan

Because your corporation is reimbursing you for your personal vehicle, using either IRS mileage rates or actual expenses, it needs an accountable plan.

Reimbursements from the Corporation

A corporation can reimburse an employee for all expenses allowable under sections 161 to 199 of the tax code—which includes Section 179 expensing and Section 168
bonus and other depreciation.

Here’s what happens when your corporation properly reimburses you for the expenses:

1. You, as the employee, receive the cash reimbursement from the corporation but do not have taxable income from the reimbursement.
2. The corporation gets the full deduction for the reimbursed expenses.
3. If the corporation is an S corporation, then those expenses reduce the corporate income and the corporation passes that reduced income to you—say, as the sole
   shareholder of your S corporation.

If you are using a personal vehicle for corporate business, please reach out to us at (512) 795-0300, because we should discuss what’s required.

As you consider the process of shutting down your S corporation, it is crucial to understand the federal income tax implications that come with it. Here, I outline the tax basics for the corporation and its shareholders under two common scenarios: stock sale and asset sale with liquidation.

Scenario 1: Stock Sale

One way to shut down an S corporation is to sell all your company stock. The gain from selling S corporation stock generates a capital gain. Long-term capital gain tax rates apply if you held the shares for more than a year. The maximum federal rate for long-term capital gains is 20 percent, but this rate affects only high-income individuals.

If you are a passive investor, you may also owe the 3.8 percent Net Investment Income Tax (NIIT) on the gain. But if you actively participate in the business, you are exempt from the NIIT. Additionally, state income tax may apply to the gain from selling your shares.

Scenario 2: Asset Sale and Liquidation

A more common way to shut down an S corporation involves selling all its assets, paying off liabilities, and distributing the remaining cash to shareholders. Here’s how the tax implications unfold.

Taxable gains and losses. The S corporation recognizes taxable gains and losses from selling its assets. These gains and losses are passed to shareholders and reported on their personal tax returns. You will receive a Schedule K-1 showing your share of the gains and losses to report on your Form 1040.

Long-term gains and ordinary income. Gains from assets held for more than a year are typically taxed as Section 1231 gains at long-term capital gains rates. But gains attributable to certain depreciation deductions are taxed at higher ordinary income rates, up to 37 percent. Real estate depreciation gains attributable to straight-line depreciation can be taxed up to 25 percent.

NIIT considerations. Passive investors may owe the 3.8 percent NIIT on passed-through gains, while active participants are exempt.

Liquidating Distributions. The cash distributed in liquidation that exceeds the tax basis of your shares results in a capital gain, taxed as a long-term capital gain if held for more than a year. If the cash is less than the basis, it results in a capital loss.

Tax-Saving Strategy for Asset Sales

Your number one strategy for tax savings is to allocate more of the sale price to assets generating lower-taxed gains (e.g., land, buildings) and less to those generating higher-taxed ordinary income (e.g., receivables, heavily depreciated assets).

Compliance and Reporting

Report asset sales and allocations on IRS Form 8594 (Asset Acquisition Statement Under Section 1060).

File the final federal income tax return using Form 1120-S, including final shareholder Schedule K-1.

If you want to discuss shutting down your S corporation, please contact us at (512) 795-0300.

The topic of business meal expenses and entertainment can be a lengthy discussion. In the context of business expenses, entertainment expenses (such as those related to amusement or recreation) are generally nondeductible unless they fall into specific exceptions. The 50% disallowance rule also limits the business deduction for certain otherwise deductible meals.

Here are some key points:

1. Business Meals Deduction:

• Business meals are generally deductible if the taxpayer proves a business connection.
• Meal expenses must be ordinary, necessary, and related to a business event.
• The meal cost should not be lavish or extravagant.
• Proper substantiation is required.
• A taxpayer or representative must be present.

2. Entertainment:

• Entertainment includes food or beverages provided during or at an entertainment activity.
• Food and beverage expenses may be excluded from otherwise disallowed entertainment under specific exceptions, such as:

1. 1. Food and beverages for employees furnished on the business premises.
   2. Compensation to employees who received the benefit.
   3. Expenses incurred in connection with services for another person and reimbursed under an accountable plan.
   4. Recreational or social activities primarily benefiting non-highly compensated employees.

If you need further information, feel free to ask us at (512) 795-0300.