100% Deductible Meals and Entertainment Expense

 

Businesses can temporarily deduct 100% beginning January 1, 2021

IR-2021-79, April 8, 2021

WASHINGTON — The Treasury Department and the Internal Revenue Service today issued Notice 2021-25  (PDF) providing guidance under the Taxpayer Certainty and Disaster Relief Act of 2020. The Act added a temporary exception to the 50% limit on the amount that businesses may deduct for food or beverages. The temporary exception allows a 100% deduction for food or beverages from restaurants.

Beginning January 1, 2021, through December 31, 2022, businesses can claim 100% of their food or beverage expenses paid to restaurants as long as the business owner (or an employee of the business) is present when food or beverages are provided and the expense is not lavish or extravagant under the circumstances.

Where can businesses get food and beverages and claim 100%?

Under the temporary provision, restaurants include businesses that prepare and sell food or beverages to retail customers for immediate on-premises and/or off-premises consumption. However, restaurants do not include businesses that primarily sell pre-packaged goods not for immediate consumption, such as grocery stores and convenience stores.

Additionally, an employer may not treat certain employer-operated eating facilities as restaurants, even if these facilities are operated by a third party under contract with the employer.

Advance Child Tax credit payments 2021

Additional Child Tax Credit Explained! 

There have been important changes to the Child Tax Credit that will help many families receive advance payments starting this summer. The American Rescue Plan Act (ARPA) of 2021 expands the Child Tax Credit (CTC) for tax year 2021 only.

The expanded credit means:

• The credit amounts will increase for many taxpayers.
• The credit for qualifying children is fully refundable, which means that taxpayers can benefit from the credit even if they don't have earned income or don't owe any income taxes.
• The credit will include children who turn age 17 in 2021.
• Taxpayers may receive part of their credit in 2021 before filing their 2021 tax return.

For tax year 2021, families claiming the CTC will receive up to $3,000 per qualifying child between the ages of 6 and 17 at the end of 2021. They will receive $3,600 per qualifying child under age 6 at the end of 2021. Under the prior law, the amount of the CTC was up to $2,000 per qualifying child under the age of 17 at the end of the year.

The increased amounts are reduced (phased out), for incomes over $150,000 for married taxpayers filing a joint return and qualifying widows or widowers, $112,500 for heads of household, and $75,000 for all other taxpayers.

Advance payments of the 2021 Child Tax Credit will be made regularly from July through December to eligible taxpayers who have a main home in the United States for more than half the year. The total of the advance payments will be up to 50 percent of the Child Tax Credit. Advance payments will be estimated from information included in eligible taxpayers' 2020 tax returns (or their 2019 returns if the 2020 returns are not filed and processed yet).

The IRS urges people with children to file their 2020 tax returns as soon as possible to make sure they're eligible for the appropriate amount of the CTC as well as any other tax credits they're eligible for, including the Earned Income Tax Credit (EITC). Filing electronically with direct deposit also can speed refunds and future advance CTC payments.

Eligible taxpayers do not need to take any action now other than to file their 2020 tax return if they have not done so.

Eligible taxpayers who do not want to receive advance payment of the 2021 Child Tax Credit will have the opportunity to decline receiving advance payments. Taxpayers will also have the opportunity to update information about changes in their income, filing status or the number of qualifying children. More details on how to take these steps will be announced soon.

The IRS also urges community groups, non-profits, associations, education groups and anyone else with connections to people with children to share this critical information about the CTC. The IRS will be providing additional materials and information that can be easily shared by social media, email and other methods.

The IRS will provide more information about advance payments soon.

Figuring and Claiming EIC in 2020

 You must meet one more rule to claim the EIC.

You need to know the amount of your earned income to see if you meet the rule in this chapter. You also need to know that amount to figure your EIC.

Rule 15—Earned Income Limits

Your earned income must be less than:

• $50,954 ($56,844 for married filing jointly) if you have three or more qualifying children,

• $47,440 ($53,330 for married filing jointly) if you have two qualifying children,

• $41,756 ($47,646 for married filing jointly) if you have one qualifying child, or

• $15,820 ($21,710 for married filing jointly) if you don't have a qualifying child.

Earned Income

Earned income generally means wages, salaries, tips, other taxable employee pay, and net earnings from self-employment. Employee pay is earned income only if it is taxable. Nontaxable employee pay, such as certain dependent care benefits and adoption benefits, isn't earned income. But there is an exception for nontaxable combat pay, which you can choose to include in earned income. Earned income is explained in detail in Rule 7 in chapter 1.

Election to use prior year earned income.

 

You can elect to use your 2019 earned income to figure your 2020 earned income credit (EIC) if your 2019 earned income is more than your 2020 earned income. To make this election, enter "PYEI" and the amount of your 2019 earned income on the dotted line next to Form 1040 or 1040-SR, line 27.

If you file a joint return and make the election, your 2019 earned income is the sum of your 2019 earned income and your spouse's 2019 earned income.

New Exclusion of up to $10,200 of Unemployment Compensation

 If your modified adjusted gross income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid in 2020, which means you don’t have to pay tax on unemployment compensation of up to $10,200. If you are married, each spouse receiving unemployment compensation doesn’t have to pay tax on unemployment compensation of up to $10,200. Amounts over $10,200 for each individual are still taxable. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. If you file Form 1040-NR, you can’t exclude any unemployment compensation for your spouse.

The exclusion should be reported separately from your unemployment compensation. See the updated instructions and the Unemployment Compensation Exclusion Worksheet to figure your exclusion and the amount to enter on Schedule 1, line 8.  

When figuring the following deductions or exclusions from income, if you are asked to enter an amount from Schedule 1, line 7 enter the total amount of unemployment compensation reported on line 7 (unreduced by any exclusion amount) and if you are asked to enter an amount from Schedule 1, line 8, enter the amount from line 3 of the Unemployment Compensation Exclusion Worksheet. See the specific form or instructions for more information. If you file Form 1040-NR, you aren’t eligible for all of these deductions. See the Instructions for Form 1040-NR for details.

• Taxable social security benefits (Instructions for Form 1040 or 1040-SR, Social Security Benefits Worksheet)
• IRA deduction (Instructions for Form 1040 or 1040-SR, IRA Deduction Worksheet)
• Student loan interest deduction (Instructions for Form 1040 or 1040-SR, Student Loan Interest Deduction Worksheet)
• Nontaxable amount of Olympic or Paralympic medals and USOC prize money (Instructions for Form 1040 or 1040-SR, Schedule 1, line 8)
• The exclusion of interest from Series EE and I U.S. Savings Bonds issued after 1989 (Form 8815)
• The exclusion of employer-provided adoption benefits (Form 8839)
• Tuition and fees deduction (Form 8917)
• The deduction of up to $25,000 for active participation in a passive rental real estate activity (Form 8582)

If you have already filed your 2020 Form 1040 or 1040-SR, you should not file an amended return. The IRS will automatically refund money to people who already filed their tax return reporting unemployment compensation. See IR-21-71  for more details.

The instructions for Schedule 1 (Form 1040), line 7, Unemployment Compensation, are updated to read as follows.

Line 7

Unemployment Compensation

You should receive a Form 1099-G showing in box 1 the total unemployment compensation paid to you in 2020. Report this amount on line 7.

Caution. If the amount reported in box 1 of your Form(s) 1099-G is incorrect, report on line 7 only the actual amount of unemployment compensation paid to you in 2020.

Caution. When figuring any of the following deductions or exclusions, include the full amount of your unemployment benefits reported on Schedule 1, line 7 (unreduced by any exclusion amount): taxable social security benefits, IRA deduction, student loan interest deduction, nontaxable amount of Olympic or Paralympic medals and USOC prize money, the exclusion of interest from Series EE and I U.S. Savings Bonds issued after 1989, the exclusion of employer-provided adoption benefits, the tuition and fees deduction, and the deduction of up to $25,000 for active participation in a passive rental real estate activity. See the specific form or instructions for more information. If you file Form 1040-NR, you aren’t eligible for all of these deductions. See the Instructions for Form 1040-NR for details.

Note. If your modified adjusted income (AGI) is less than $150,000, the American Rescue Plan enacted on March 11, 2021, excludes from income up to $10,200 of unemployment compensation paid to you in 2020. For married taxpayers, you and your spouse can each exclude up to $10,200 of unemployment compensation. For example, you file jointly with your spouse and your modified AGI is less than $150,000. You were paid $20,000 of unemployment compensation and your spouse was paid $5,000. Report the $25,000 (the total amount of your unemployment compensation) on line 7 and report $15,200 on line 8 as a negative amount (in parentheses).  The $15,200 excluded from income is all of the $5,000 unemployment compensation paid to your spouse, plus $10,200 of the $20,000 paid to you. If your modified AGI is $150,000 or more, you can’t exclude any unemployment compensation. Use the Unemployment Compensation Exclusion Worksheet to figure your modified AGI and the amount to exclude. If you file Form 1040-NR, you can’t exclude any unemployment compensation for your spouse.

If you made contributions to a governmental unemployment compensation program or to a governmental paid family leave program and you aren't itemizing deductions, reduce the amount you report on line 7 by those contributions. If you are itemizing deductions, see the instructions on Form 1099-G.

Caution. Your state may issue separate Forms 1099-G for unemployment compensation received from the state and the additional $600 a week federal unemployment compensation related to coronavirus relief. Include all unemployment compensation received on line 7.

If you received an overpayment of unemployment compensation in 2020 and you repaid any of it in 2020, subtract the amount you repaid from the total amount you received. Enter the result on line 7. Also enter “Repaid” and the amount you repaid on the dotted line next to line 7. If, in 2020, you repaid more than $3,000 of unemployment compensation that you included in gross income in an earlier year, see Repayments in Pub. 525 for details on how to report the payment.

Tip. If you received unemployment compensation in 2020, your state may issue an electronic Form 1099-G instead of it being mailed to you. Check your state's unemployment compensation website for more information.

Unemployment Compensation Exclusion Worksheet – Schedule 1, Line 8

1. If you are filing Form 1040 or 1040-SR, enter the total of lines 1 through 7 of Form 1040 or 1040-SR. If you are filing Form 1040-NR, enter the total of lines 1a, 1b, and lines 2 through 7.
    
2. Enter the amount from Schedule 1, lines 1 through 6. Don't include any amount of unemployment compensation from Schedule 1, line 7 on this line.
    
3. Use the line 8 instructions to determine the amount to include on Schedule 1, line 8, and enter here. Do not reduce this amount by the amount of unemployment compensation you may be able to exclude.
    
4. Add lines 1, 2, and 3.
    
5. If you are filing Form 1040 or 1040-SR, enter the amount from line 10c. If you are filing Form 1040-NR, enter the amount from line 10d.
    
6. Subtract line 5 from line 4. This is your modified adjusted gross income.
    
7. Is the amount on line 6 $150,000 or more?
    

   a. [ ] Yes. Stop You can't exclude any of your employment compensation
   b. [ ] No. Go to line 8

   
    
8. Enter the amount of unemployment compensation paid to you in 2020. Don't enter more than $10,200.
    
9. If married filing jointly, enter the amount of unemployment compensation paid to your spouse in 2020. Don't enter more than $10,200. If you are filing Form 1040-NR, enter -0- .
    
10. Add lines 8 and 9 and enter the amount here. This is the amount of unemployment compensation excluded from your income.
     
11. Subtract line 10 from line 3 and enter the amount on Schedule 1, line 8. If the result is less than zero, enter it in parentheses. On the dotted line next to Schedule 1, line 8, enter "UCE" and show the amount of unemployment compensation exclusion in parentheses on the dotted line. Complete the rest of Schedule 1 and Form 1040, 1040-SR, or 1040-NR.

 New Updates on Tax Laws mid season (March 2021)

IRS: New Form 8915 E Qualified 2020 Retirement Plan Distribution

New Exclusion on $10 200 of Unemployment Income received in 2020

Election to use Prior year (2019) income for EIC if Higher

Form 8915-E Qualified 2020 Disaster Retirement Plan Distributions & Repayments

 

Form 8915-E - Qualified 2020 Disaster Retirement Plan Distributions and Repayments

 

Form 8915-E is used by taxpayers who were adversely affected by the coronavirus in 2020 and who
received a retirement plan distribution that qualifies for favorable tax treatment. The distribution, whether an actual distribution or a plan loan offset, can be made from a variety of retirement plans:

• An IRA: traditional, SEP, SIMPLE, or Roth.
• A qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan).
• A qualified annuity plan.
• A tax-sheltered annuity contract.
• A governmental section 457 deferred compensation plan.

Separate forms are completed for married filers who both received qualified distributions. The entire qualified distribution can be included in income in 2020, or it can be spread out equally over three years. Exception: the entire distribution must be reported on the 2020 tax return if the taxpayer (or spouse, if applicable) dies in 2020.

Note: If you are including Form 8915-E in the return, the taxable amount of the distribution in the Form 1099-R entry window should be zero. The taxable amount will then flow to the return from Form 8915-E.

There are several caveats:

• The distribution must have been made before December 31, 2020.
• The distribution must have been made to a "qualified individual", defined as someone who meets any of the following criteria:
  • The taxpayer who was diagnosed with coronavirus, or
  • The taxpayer with a spouse or dependent who was diagnosed with coronavirus, or
  • The taxpayer, spouse, or anyone who shares the taxpayer's principal residence experienced adverse financial consequences as a result of any of the following:
  • quarantine, furlough, layoff, or reduced work hours due to coronavirus;
  • inability to work due to lack of childcare due to coronavirus;
  • closing or reducing the hours of a business they own or operate due to coronavirus;
  • reduced pay or self-employment income due to coronavirus;
  • job offer rescinded or start date delayed due to coronavirus.
• The total of all qualified distributions from all retirement plans is $100,000. The excess over $100,000 may be subject to the additional tax on early distributions. If separate forms are being completed for a taxpayer and spouse, the $100,000 limit applies to each separately.
• A distribution treated as a 2020 disaster distribution isn't eligible for either the 20% Capital Gain Election or the 10-Year Tax Option on Form 4972.
• Qualified distributions can be repaid. The repayments are treated as trustee-to-trustee transfers, and repayments before the tax return is filed can be included on Form 8915-E. Certain distributions cannot be repaid, however:
  • Qualified 2020 disaster distribution received as a beneficiary (other than a surviving spouse).
  • Required minimum distribution.
  • Non-IRA distribution that is part of a series of substantially equal periodic payments made for
  • a period of ten years or more, or
  • the taxpayer's life expectancy, or
  • the joint lives or joint life expectancies of the taxpayer and their beneficiary.

If a taxpayer received distributions in 2020 for 2018 and/or 2019 disasters and is filing Forms 8915-C and/or 8915-D, respectively, those forms need to be completed before completing Form 8915-E. See the Form 8915-E instructions for guidance on coordinating the forms and distributions.

Additional Information:

IRS: Form 8915-E instructions