Federal Tax Update 1.

• Author: Josephs, Stuart R.

2021 Consolidated Appropriations Act

The 2021 Consolidated Appropriations Act (CAA) (P.L. 116-260, enacted Dec. 27, 2020) contains several measures providing new COVID-19 relief. Selected highlights follow.

Business Meals Deduction

Existing IRC Sec. 274(n)(l) generally limits the deduction for business-related food or beverages expenses to 50 percent of the amount otherwise deductible.

For only 2021 and 2022, the CAA allows a 100 percent deduction for business-related meals and beverages provided at a restaurant.

This 100 percent deduction is allowed pursuant to Sec. 274(n) (2)(D), which was added to the IRC by Sec. 210(a) of the 2020 Taxpayer Certainty and Disaster Tax Relief Act (Act), enacted as Division EE of the CAA.

Restaurants Defined & Exclusions

IRS Notice 2021 -25 (IRB 2021-17, April 26, 2021) states that, for purposes of Sec. 274(n)(2)(D), the term "restaurant" means a business that prepares and sells food or beverages to retail customers for immediate consumption--regardless of whether the food or beverages are consumed on the business' premises.

A restaurant does not include a business that primarily sells prepackaged food or beverages not for immediate consumption, such as a grocery store; specialty food store; beer, wine or liquor store; drugstore; convenience store; newsstand; or vending machine or kiosk.

In addition, an employer may not treat as a restaurant for Sec. 274(n)(2)(D) purposes:

1. Any eating facility on the employer's business premises and used in furnishing meals excluded from an employee's gross income under Sec. 119; or

2. Any employer-operated eating facility treated as a de minimis fringe under Sec. 132(e)(2), even if this facility is operated by a third party under contract with the employer as described in Regs. Sec. 1.132-7(a)(3).

   Other Requirements

   Sec. 274(k)(l) generally disallows deductions for food or beverages expenses unless:

1. The expenses are not lavish or extravagant under the circumstances; and

2. The taxpayer, or an employee of the taxpayer, is present at the furnishing of such food or beverages.

   Sec. 274(a)(1) generally disallows deductions for expenses for entertainment, amusement or recreation. However, Regs. Sec. 1.274-1 l(b)(l)(ii) states that this disallowance does not apply to food or beverages provided at an entertainment activity if:

   * The food or beverages are purchases separately from the entertainment; or

   * The food or beverages cost is separately stated from the entertainment cost on one or more invoices, bills or receipts. The amount charged for food or beverages on an invoice, bill or receipt must reflect the venue's usual selling cost for those items if they were purchased separately from the entertainment or must approximate the reasonable value of those items.

   If the food or beverages are not purchased separately from the entertainment, or the food or beverages cost is not staled separately from the entertainment cost on one or more invoices, bills or receipts, no allocation between entertainment and food or beverages may be made and, generally, the entire amount is a nondeductible entertainment expense.

   Charitable Contributions

   As discussed in the August 2020 California CPA, Page 19, the CARES Act (enacted March 27, 2020) permitted an individual for 2020, who does not elect to itemize deductions to claim a deduction up to $300, for a tax filing unit, toward adjusted gross income (AGI) for qualified charitable contributions. A qualified contribution is a cash payment to a charitable organization described in Sec. 170(b)(1) (A), except:

   * A supporting organization described in Sec. 509(a)(3); and

   * For establishing a new, or maintaining an existing, donor advised fund.

   Contributions of noncash property, such as securities, are not qualified contributions.

   Percentage Limitations

   For individuals, the deduction for qualified contributions for 2020 was allowed up to the amount by which the taxpayer's contributions base (AGI without any NOL carryback) exceeds the deduction for other charitable contributions.

   For corporations, the deduction for qualified contributions was allowed up to 25 percent of its taxable income for 2020.

   For charitable contributions of food inventory qualifying for the enhanced deduction under Sec. 170(e)(3), the deduction was allowed up to 25 percent of taxable income for 2020.

   The CAA extends these provisions to 2021.

   Under Act Sec. 212(a), CAA Division EE, the following modifications to the S300 deduction are made for 202 1:

1. This deduction is increased to S600 for married couples filing joint returns [Sec. 170(p)].

2. Instead of being deductible toward AGI, this deduction is now allowable from AGI to arrive at taxable income [Sec. 63(b)(4)].

3. If this deduction is overstated, the Sec. 6662 accuracy-related penalty is increased from 20 percent to 50 percent [Sec. 6662(1)], added to the IRC by Act Sec. 212(b)(2), (CAA Division EE).

   Forgiven PPP Loans and Business Expenses

   The amount of a Paycheck Protection Program (PPP) loan that is subsequently forgiven is excluded from income, even though a forgiven loan generally produces taxable debt cancellation income.

   The IRS previously determined in Notice 2020-32 that any business expenses paid with a forgiven PPP loan were not deductible because the IRC and relevant regulations prohibit deducting business expenses allocable to tax-exempt income.

   However, the CAA expressly provides that the intent of the original PPP legislation was that these expenses arc deductible.

   Rev. Rul. 202 1-2, effective for tax years ending after Mar. 27, 2020, reverses the position taken in Notice 2020-32 and conforms to the CAA.

   Disaster Tax Relief

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