Tax

Since 1986, lawmakers have limited business meal deductions: first to 80 percent, and then to 50 percent (unless an exception applies).

But on December 27, 2020, in an effort to help the restaurant industry due to the COVID-19 pandemic, lawmakers enacted a new, temporary 100 percent business meal deduction for calendar years 2021 and 2022.

To qualify for the 100 percent deduction, you need a restaurant to provide you with the food or beverages.

The law requires only that the restaurant provide the food and beverages. You don’t have to pay the money directly to the restaurant. For example, you qualify for the 100 percent deduction if you order a restaurant meal that’s delivered by Uber Eats or Grubhub.

Your deductible business meals must be tax code Section 162 ordinary and necessary business expenses, and they must not be subject to disallowance under tax code Section 274.

You must be present at the business meal, and you must provide the business meal to a person with whom you could reasonably expect to engage or deal with in the active conduct of your business, such as a customer, client, supplier, employee, agent, partner, or professional advisor, whether established or prospective.

Remember, to qualify for the 100 percent deduction, you need a restaurant. The IRS recently provided definitions and examples of what is and is not a restaurant.

A restaurant is “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’s premises.” It is not any of the following:

• Grocery stores
• Specialty food stores
• Beer, wine, or liquor stores
• Drug stores
• Convenience stores
• Newsstands
• Vending machines or kiosks

In general, the 50 percent limitation applies to business meals from the sources listed above.

The restaurant creates the 100 percent deduction.

If you would like to discuss your business meal activities, please call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 25, 2021

You likely did not have this top of mind.

The federal Rehabilitation Tax Credit, or rehab credit, offers significant financial incentives for owners and leaseholders of historic buildings to renovate those structures.

What’s the big deal? Why are tax credits so exciting?

Tax credits, unlike deductions, reduce your tax bill dollar-for-dollar. If you spend $100,000 and get a 20 percent tax credit, you reduce your tax bill by $20,000. That’s Uncle Sam putting $20,000 in your pocket. And there’s more.

You likely reduce your taxes with depreciation deductions on the other $80,000 and also qualify for a rehab credit from your state (most states grant rehab tax credits).

The rehab credits give you a leg up on your property because you can have the feds and states giving you money without asking for any equity in your building.

Here are the four requirements for you to qualify for the historic rehab credit:

1. Certified Historical Structure

The U.S. Secretary of the Interior must accredit your building as a “certified historic structure.” 

Certification requests are made through your State Historic Preservation Officer on National Park Service (NPS) Form 10-168, Historic Preservation Certification Application. The 

request for certification should be made prior to physical work beginning on the building.

1. Income-Producing Property

Your building must be depreciable and income-producing. Thus, qualifying properties include, among others:

• Commercial buildings
• Industrial buildings
• Agricultural buildings
• Apartments
• Single-family rentals

You cannot claim the rehab credit for expenditures on tax-exempt-use property. Your project generally will be disqualified if more than 50 percent of your building is leased by a tax-exempt entity.

3. Substantial Expenditure and Required Time Period

The tax code says that you substantially rehabbed the structure only if the qualified rehab expenditures during the 24-month period selected by you, and ending with or within the taxable year, exceed the greater of

• the adjusted basis of such building (and its structural components, but not the land), or 
• $5,000.

If you complete the rehab in phases, the same rules apply, except that you have 60 months to complete the rehab project. This phase rule is available only if you meet three conditions:

1. There is a written set of architectural plans and specifications for all phases of the rehab. 
2. You must complete the written plans before the physical work on the rehab begins, and you must be reasonably certain that you will complete all phases of the rehab.
3. You must place the property in service.

4. Costs That Count

In general, only costs directly related to the repair or improvement of structural and architectural features of the historic building are eligible for the rehab credit. Therefore, you can generally claim expenditures for the following items: 

• Walls, floors, ceilings, windows, doors, stairs, etc.
• Elevators, escalators, sprinkler systems, fire escapes
• Plumbing, plumbing fixtures, electrical wiring, electrical fixtures

In addition, you can generally claim any other fees paid that would normally be charged to a capital account, such as:

• Construction period interest and taxes
• Architect and engineering fees
• Construction management costs
• Reasonable developer fees

Don’t Forget About the States

Keep in mind, we are talking about a 20 percent tax credit at the federal level. Now, we have more good news! 

In addition to the federal tax credits, 39 states offer rehab tax credits ranging up to 50 percent. This means that if your building is in a state that offers a 50 percent rehab credit, the total reduction in the cost of your project could be as much as 70 percent!

As you can see, there’s much to consider with the historic rehab. If you would like to discuss the historic rehab credits, please don’t hesitate to call me on my direct line at 408-778-9651.

• By Leon Clinton
• May 22, 2021

Do you own business or investment property that has gone up in value? Would you like to acquire new property? 

If you sell the old property, you’ll have to pay tax on your profits. Don’t do that. Instead, do a tax-deferred Section 1031 transaction.

With a properly constructed Section 1031 transaction, you

1. sell your old property,
2. buy the replacement property, and
3. pay no taxes.

To make this work, your first step is to engage a Section 1031 intermediary.

Second, you need to buy a replacement property of equal or greater value than the property you sell.

You may have noted that I left out the word “exchange” when introducing Section 1031. I did that on purpose, because to exchange means to trade. In the Section 1031 exchanges I’m familiar with, it’s never a swap of properties. Instead, it’s a sale and purchase using the Section 1031 rules to defer the taxes. 

The Section 1031 exchange rules are complex and include strict deadlines for identifying and acquiring the property involved. To do this right, you need a qualified intermediary, which can be a bank, a lawyer, or a Section 1031 company.

In the past, Section 1031 allowed both personal property and real property exchanges. The Tax Cuts and Jobs Act eliminated personal property exchanges, such as trading in your vehicle for a replacement. 

But real property exchanges remain. They are true tax-saving machines. And the new IRS regs make it clear that a Section 1031 transaction does not get in the way of cost segregation—a method used to speed up depreciation on real property.

If you would like to discuss the possible use of a Section 1031 transaction to upgrade your rental or business property portfolio, please call me on my direct line at 408-778-9651. 

• By Leon Clinton
• May 17, 2021