Author: Leon Clinton

Tax

Helicopter View of 2023 Meals and Entertainment

I hope this letter finds you well. As your tax advisor, I want to provide you with the latest updates on the business meal deduction for the year 2023 and beyond.

As you may already know, there have been some significant changes to the business meal deduction for 2023 and beyond. The deduction for business meals has been reduced to 50 percent, a significant change from the previous 100 percent deduction for business meals in and from restaurants, which was applicable only for the years 2021 and 2022.

To help you better understand the current situation, see the table below:

Amount Deductible for Tax Year 2023 and Beyond
Description100%50%Zero
Restaurant meals with clients and prospects X 
Entertainment such as baseball and football games with clients and prospects  X
Employee meals for convenience of employer, served by in-house cafeteria X 
Employee meals for required business meeting, purchased from a restaurant X 
Meal served at chamber of commerce meeting held in a hotel meeting room X 
Meal consumed in a fancy restaurant while in overnight business travel status X 
Meals cooked by you in your hotel room kitchen while traveling away from home overnight X 
Year-end party for employees and spousesX  
Golf outing for employees and spousesX  
Year-end party for customers  X
Meals made on premises for general public at marketing presentationX  
Team-building recreational event for all employeesX  
Golf or theater outing or football game with your best customer  X
Meal with a prospective customer at a country club following your non-deductible round of golf X 

The table above provides a valuable summary resource for you. Please take some time to review it periodically. If you have any questions or concerns, please do not hesitate to contact me on my direct line at 408-778-9651.

Tax

SECURE 2.0 Adds New Escapes from the 10% Early Withdrawal Penalty

In late 2022, Congress passed the SECURE 2.0 Act, which made several changes to tax-advantaged retirement plans. Many of the changes create new exceptions to the 10 percent penalty on early withdrawals from IRAs and other retirement accounts before age 59 1/2.

Starting in 2024, you will have more options than ever before to withdraw money from a retirement account without penalty. Unfortunately, most exceptions require experiencing something negative, such as a financial emergency, domestic abuse, a terminal illness, or a disaster.

It’s important to note that while these withdrawals will not be subject to the 10 percent early withdrawal penalty, you must pay regular income tax on withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s. Withdrawals from Roth IRAs held for five years are not subject to income tax.

In 2024, a new emergency personal expense withdrawal exception to the 10 percent penalty will allow you to withdraw up to $1,000 from your retirement accounts in case of almost any type of financial emergency. But you can only do so once every three years unless you pay back the money first.

Starting in 2024, taxpayers who suffer abuse from a spouse or domestic partner may withdraw up to $10,000 penalty-free. Domestic abuse is broadly defined to include physical, psychological, sexual, emotional, or economic abuse.

If you expect to die from a terminal illness within seven years, you can withdraw any amount from your retirement accounts penalty-free—immediately. A doctor must certify your terminal illness.

Starting in 2026, retirement account owners may take penalty-free annual distributions of up to $2,500 to help pay for long-term care insurance for themselves or their spouses.

You can withdraw up to $22,000 from your retirement accounts penalty-free if a federally declared disaster damages your primary residence. This provision is retroactive to January 26, 2021, and applies to all federally declared disasters.

Some of these exceptions can be combined. For example, you could take a penalty-free emergency personal expense distribution and domestic abuse distribution in the same year for a maximum of $11,000. If a federally declared disaster damages your home, you could add up to $22,000. But let’s hope you never experience any of these adverse situations.

If you want to discuss any of the new provisions mentioned above, please call me on my direct line at 408-778-9651.

Tax

Holding Real Property in a Corporation: Good or Bad Idea?

As the real estate market has cooled off in many parts of the country, investing in property may seem wise in the long run.

But taxes can be a significant concern.

Owning real estate in a C corporation may not be wise when considering taxes because it puts you at risk of being double-taxed.

This means that if you sell the property and make a profit, the gain may be subject to taxation twice—once at the corporate level and again at the shareholder level when the corporation pays out profits to shareholders as dividends.

The Tax Cuts and Jobs Act reduced the double taxation threat, but with our current federal debt, you face the risk that lawmakers will hike the corporate tax rates and possibly tax dividends at higher ordinary income rates.

To avoid this threat, I usually recommend using a single-member LLC or revocable trust to hold real property. A disregarded single-member LLC delivers super-simple tax treatment combined with corporation-like liability protection, while a revocable trust can avoid probate and save time and money.

If you are a co-owner of real property, it is advisable to set up a multi-member LLC to hold the property. The partnership taxation rules that multi-member LLCs follow have several advantages, including pass-through taxation.

In conclusion, holding real property in a C corporation can expose you to the risk of double taxation, and I don’t recommend it. Instead, consider a single-member LLC, revocable trust, or multi-member LLC, depending on your situation.

If you want to discuss the entities that may be best in your situation, please call me on my direct line at 408-778-9651.

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