Article Highlights:

Charitable Contributions for Non-Itemizers
Penalties for Contribution Overstatement
Cash Contributions for Itemizers
Substantiation Requirements

As a means to stimulate charitable contributions during the COVID crisis, Congress made two notable changes for 2020—one allowing taxpayers that don’t itemize their deductions an above-the-line deduction for cash contributions of up to $300 and another for those itemizing their deductions to increase the maximum deduction for cash contributions to 100% of their adjusted gross income (AGI). The recent COVID-related tax relief act, passed late in December, extends and enhances those liberalized charitable contribution deduction provisions. Here is a rundown on these charitable contribution tax benefits for 2021:

Charitable Contributions for Non-Itemizers – The Taxpayer Certainty and Disaster Tax Relief Act allows those who don’t itemize their deductions a deduction of up to $300 for cash contributions made during 2021. Married couples filing jointly are allowed a deduction of up to $600 for the cash contributions they make during 2021. This is an increase from 2020, when the contribution was limited to $300 regardless of filing status. However, contributions by non-itemizers to new or existing donor-advised funds or private foundations don’t qualify for either year. For 2021, the $300 or $600 amount is an add-on to a non-itemizer’s standard deduction. Claiming the deduction as part of the standard deduction for 2021 may not be quite as beneficial tax-wise for some taxpayers as was the deduction for 2020. This is because on 2020 returns the cash contributions, up to $300, are deducted in computing adjusted gross income, while on 2021 returns, the deduction will be taken after the AGI is figured. This distinction matters because many credits and other tax benefits are limited by the AGI amount. Apparently, Congress anticipates that non-itemizers will abuse this new deduction by taking the deduction without actually making a contribution. In a preemptive attempt to head off such behavior, Congress also increased the accuracy-related tax penalty from 20% to 50% on an underpayment of tax resulting when a non-itemizing taxpayer improperly claims the charitable contribution deduction.
Cash Contributions for Itemizers – Under the CARES Act that was enacted in March 2020, the 60% deduction limit on cash contributions to most charities was suspended for 2020, thus allowing larger cash contributions during the COVID crisis—potentially up to 100% of the AGI. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, the suspension of the 60% limit has been extended to 2021.

Cash contributions include those paid by cash, check, electronic funds transfer or credit card. Taxpayers cannot deduct a cash contribution, regardless of the amount, unless they can document the contribution in one of the following ways:
A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include: a. A canceled check, b. A bank or credit union statement or c. A credit card statement.
A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization and the date and amount of the contribution.
Payroll deduction records that include a pay stub showing the contribution and a pledge card showing the name of the charitable organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction.
To claim a deduction for a contribution of $250 or more, the taxpayer must have a written acknowledgment of the contribution from the qualified organization that includes the following details:

The amount of cash contributed;
Whether the qualified organization gave the taxpayer goods or services (other than certain token items and membership benefits) as a result of the contribution and a description and good-faith estimate of the value of any goods or services that were provided (other than intangible religious benefits); and
A statement that the only benefit received was an intangible religious benefit, if that was the case.

Thus, for example, money dropped in a Christmas Kettle or tacked onto your purchase at a retail store would not be deductible because there is no documentation that the contribution was made. If you have questions related to how charitable contributions might affect your tax return or how to document charitable contributions of any type, please call this office.

Article Highlights:

Business Meals Under TCJA
100% Deduction for 2021 and 2022
Qualifications

If you recall, the Tax Cuts and Jobs Act (TCJA), effective beginning in 2018, eliminated the business-related deduction for entertainment, amusement or recreation expenses. However, it did retain a deduction for business meals when the expense is ordinary and necessary for carrying on the trade or business and is not lavish or extravagant, along with some other requirements noted below. Under TCJA, the business-meal deduction continues to be 50% of the actual expense. Also remember that business meals must be documented, including the amount, business purpose, date, time, place and names of the guests as well as their business relationship with you. Great News – For 2021 and 2022 only, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 allows businesses to deduct 100% of business meal expenses under the following circumstances:

The food or beverages must be provided by a restaurant. The use of the word “by” (rather than “in”) a restaurant makes it clear that the new rule isn’t limited to meals eaten on the restaurant’s premises. Takeout and delivered meals provided by a restaurant are also fully deductible.
The expense is an ordinary and necessary expense paid or incurred during the taxable year in carrying on any trade or business.*
The expense is not lavish or extravagant under the circumstances.*
The taxpayer or their employee is present at the furnishing of the food or beverages.*
The food and beverages are provided to a current or potential business customer, client, consultant or similar business contact.*

IRS regulations expand on the last requirement by explaining that to be deductible, the food or beverages must be provided to a “person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer’s trade or business such as the taxpayer’s customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective.” Where food or beverages are provided at an entertainment activity, the food and beverage must be documented separately from the entertainment because entertainment is not deductible. Also, be cautious of the requirement that food or beverages be provided by a restaurant to be eligible for 100% deductibility pending IRS regulations defining what constitutes a restaurant. *Meals and beverages not provided by a restaurant will be deductible but limited to a 50% deduction of the expense if otherwise meeting the qualifications of a business meal. If you have questions about how this 100% meal deduction might apply to your business, please give this office a call.

Article Highlights:

Standard Mileage Rates for 2021
Business, Charitable, Medical and Moving Rates
Important Considerations for 2021
Switching between the Actual Expense and Standard Mileage Rate Methods
Employer Reimbursements
Employee Deductions Suspended
Special Allowances for SUVs

The Internal Revenue Service (IRS), each year, computes standard mileage rates for the use of a vehicle for business, medical and moving purposes based on a number of factors, to determine the standard mileage rates for the following year. As it does annually around the end of the year, the IRS has announced the 2021 optional standard mileage rates. Thus, beginning on Jan. 1, 2021, the standard mileage rates for the use of a car (or a van, pickup or panel truck) are:

56 cents per mile for business miles driven (including a 26-cent-per-mile allocation for depreciation). This is down from 57.5 cents in 2020;
16 cents per mile driven for medical or moving* purposes. This is down from 17 cents in 2020; and
14 cents per mile driven in service of charitable organizations. * For years 2018 through 2025, the deduction for moving is only allowed for members of the armed forces on active duty who move pursuant to a military order.

The business standard mileage rate is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs determined by the same study. The rate for using an automobile while performing services for a charitable organization is statutorily set (it can only be changed by Congressional action) and has been 14 cents per mile for 23 years). Important Consideration: The 2021 rates take into account 2020 fuel costs. Based on the potential for substantially higher gas prices in 2021, it may be appropriate to consider switching to the actual expense method for 2021 or at least to keep track of the actual expenses, including fuel costs, repairs and maintenance, so that the option is available for 2021. Taxpayers always have the choice of calculating the actual costs of using their vehicle for business rather than using the standard mileage rate. In addition to the potential for higher fuel prices, the 100% bonus depreciation deduction and increased depreciation limitations for passenger autos provided by the 2017 Tax Cuts and Jobs Act may make using the actual expense method worthwhile during the first year when a vehicle is placed into business service. However, the business standard mileage rate cannot be used if you used the actual method (using Section 179, bonus depreciation and/or MACRS depreciation) in previous years. This rule is applied on a vehicle-by-vehicle basis. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles simultaneously. Employer Reimbursement – When employers reimburse employees for business-related car expenses using the standard mileage allowance method for each substantiated employment-connected business mile, the reimbursement is tax-free if the employee substantiates to the employer the time, place, mileage and purpose of the employment-connected business travel, and returns any excess payment to the employer. This reimbursement arrangement is referred to as an accountable plan. The Tax Cuts and Jobs Act eliminated employee business expenses as an itemized deduction, effective for 2018 through 2025. Therefore, during this period employees may not take a deduction on their federal returns for unreimbursed employment-related use of their autos, light trucks or vans. Since they no longer get any tax benefit, employees with significant job-related auto usage should ask their employers to set up an accountable plan to reimburse them. Members of a reserve component of the U.S. Armed Forces, state and local government officials paid on a fee basis and certain performing artists continue to be allowed to deduct unreimbursed employee travel expenses, including the business standard mileage rate, because they are deductible from gross income rather than as an itemized deduction. Self-employed individuals continue to be able to deduct use of their personal vehicle for business purposes as an expense of the business if properly substantiated. Faster Write-Offs for Heavy Sport Utility Vehicles (SUVs) – Many of today’s SUVs weigh more than 6,000 pounds and are therefore not subject to the deduction limit rules for luxury auto depreciation. Taxpayers who purchase a heavy SUV and put it into business use in 2021 can utilize both the Section 179 expense deduction, up to a maximum for 2021 of $26,200, and the bonus depreciation (if the Section 179 deduction is claimed, it must be applied before the bonus depreciation) to produce a sizable first-year tax deduction. However, the vehicle cannot exceed a gross unloaded vehicle weight of 14,000 pounds. Caution: Business autos are 5-year class property. If the taxpayer subsequently disposes of the vehicle before the end of the 5-year period, as many do, a portion of the Section 179 expense deduction will be recaptured and must be added back to the taxpayer’s income (self-employment income for self-employed individuals). The future ramifications of deducting all or a significant portion of the vehicle’s cost using Section 179 should be considered. Generally, for vehicles weighing more than 6,000 pounds, using 100% bonus depreciation is the better option. If you have questions related to the best methods of deducting the business use of your vehicle or the documentation required, please give this office a call.