Long Overdue Updates to Tax Filing and Payment Deadlines

This post is long overdue and I apologize for not putting out anything sooner here, but the busy season has been tough, as many clients are pushing harder to get their refunds as soon as possible in these troubled times. As our country continues to cope with the Coronavirus crisis, both the IRS and states have made more changes to filing and payment deadlines for your 2019 returns as well as 2020 estimated payments. Estimated payments generally only concern self-employed taxpayers and taxpayers with significant investment income in addition to their regular salaries.

As I mentioned in my last post, any additional federal taxes owed for 2019 are due on July 15 and nearly all states have elected to follow or automatically follow federal policy in this regard. Additionally, your 2019 returns are also not required to be filed until July 15. Previously, the Internal Revenue Service and most states still required returns to be filed by April 15 despite the deadline for final payments being extended to July 15. To make everything simpler, both the final payment for the remaining amount owed for 2019 as well as the return filing are now both due on July 15. No late payment interest or penalties will be applied to federal taxes paid for 2019 so long as they are paid before July 15, 2020. However, please note that if you did not have at least 90% of your federal or state tax liability paid up before then, underpayment penalties will still apply. Additionally, while the Internal Revenue Service and most states are waiving late payment penalties and interest for payments made after April 15 but before July 15, some states are still imposing late payment interest on any 2019 payments made after April 15. Check with your state's department of revenue if you owe additional state tax for 2019 to see if interest will be charged on any payments made after April 15 but before July 15.

If you are self-employed or have a significant amount of investment income in addition to your regular salary, you normally would need to make your first quarterly estimated payment for 2020 by April 15 and your second quarterly estimated payment by June 15. However the Internal Revenue Service and most states have changed both the first and second quarterly payment due dates to July 15. While this somewhat simplifies things for taxpayers required to make estimated payments, this means 50% of your estimated tax must be made by July 15. Additionally, while nearly all states have followed the federal first quarterly payment deadline of July 15, for some states, the second quarterly payment deadline remains at June 15. In these states, this means that the state tax payment due on July 15 is based off your January, February and March income, while the state tax payment due on June 15 is based off your April, May and June income. States still following the June 15 rule for the second quarter may still move the deadline to July 15 as well. Verify this information on your state's department of revenue website.

Many clients have been asking about the federal stimulus payment and this will follow in a subsequent post. Meanwhile, continue to check the IRS website for more information and the status of your stimulus payment at: https://www.irs.gov/coronavirus/economic-impact-payments

Hot off the Presses! Federal Tax Payment Deadline Extended to July 15, 2020

For my clients and others that owe additional federal tax on their 2019 personal tax return, relief has been granted by the Internal Revenue Service. Federal tax owed on your 2019 return, which would normally be due on April 15, will now be due on July 15, for up to $1 million of tax due. You can delay or stretch out payments on additional tax owed for 2019 and not face any late payment penalties or interest, provided the total amount owed is paid in full by July 15.

While the filing deadline is still April 15, extensions can be electronically filed for everyone who has not filed by then, and late filing penalties may be avoided as well. The filing deadline may also be extended but the Internal Revenue Service has not announced anything official on this.

Please note that this applies only to federal taxes owed and not state taxes; however, most states are expected to follow suit and change the deadline as well.

If you expect to receive a refund on your federal return, this change does not affect you.

Busy Season Begins...

Just finished watching a rather intense Super Bowl, and it's time to get ready for another season of a lot of late nights and take-out food. The same reminder I give every year - if you have your tax records already, now, meaning right now, is the time to send them to your tax professional to complete your tax return. As the season progresses, the backlog grows and the closer to April 15 you wait to request your tax return being prepared, the more likely your professional will need to file an extension for you. Don't procrastinate if you do not need to. Of course, it is understandable that you may not have all your documents until later in the season... still, if you have some but not all of them, send them to your tax professional anyway, as they can be entered and they will be able to move your tax return along that much faster when you have everything else ready.

In any case, do not come to your tax professional on April 14 with all your documents and expect the return to be ready the next day... you may be sorely disappointed. Also, don't be offended if your tax professional doesn't pick up the phone or answer your emails as quickly over the next three months, it isn't anything personal at all, they are simply buried under a lot of work and the phones and email are not as high a priority. Take care everyone, like every tax professional, I'll be coming up for air again in April!

The New Meals & Entertainment Deduction

The 2018 Tax Cuts & Jobs Act brought a lot of changes to the federal tax scheme, but the word "Cuts" in the title was a little misleading. Not every aspect of the laws that greatly overhauled our federal tax code actually resulted in cuts to our federal tax liability. The changes to our tax laws that caused reductions to federal tax liability for some were paid for by changes that caused increases to federal tax liability for others. At least some of the federal tax cuts being enjoyed by others have been paid for by a reduced deduction for meals & entertainment by businesses. While larger companies have most likely been able to absorb the effects of this reduced deduction, smaller businesses may have felt a harmful impact.

Meals & entertainment provided to employees as compensation and for company parties are 100% deductible, the same as under the old rules. The IRS has clarified this rule by stating that at least half the employees must be present for the meal or entertainment to be deductible (theoretically, at a company-wide holiday party, more than half the employees would be present). Other snacks and meals provided to employees while they are working during the day or traveling for the company, but not in a group comprising more than half the company's entire workforce, are only 50% deductible. Meals or entertainment cannot be "lavish or extravagant" to be deductible - not easy to define but I would suggest not buying foie gras or hiring Cirque du Soleil to perform for your employees. Also, when the owner travels on company business, the 50% deduction on meals continues to apply.

Any meals provided to clients and employees or the owner(s) while discussing business remain at a 50% deduction, while money spent entertaining clients - i.e., concerts, watching professional sports, playing golf - are now completely non-deductible. No doubt that these rules have greatly angered owners of golf courses and the boards of country clubs, but it is doubtful they caused any downward pressure on ticket prices at most professional sports or concert arenas (unfortunately, whether you wanted to take clients or go on your own). Membership at most country and social clubs had already been declining heavily over the years as a lot of business and social networking moved online. Nevertheless, there will always be professions with clients who feel afternoons at a golf course can never be replaced and will always spend the money, regardless of what can be deducted (money spent on food and alcohol while golfing or afterwards, remains deductible).

Here remains the big question - when I worked in a tax practice in the large firm world, there were large events where meals and entertainment that were attended by both employees and clients. Food would be consumed and entertainment enjoyed by both groups of people. In that situation, the food eaten by employees and owners would be 100% deductible (provided at least half the company's employees attended) while any food eaten by clients would be only 50% deductible. Entertainment that employees enjoy would be fully deductible while anything the clients enjoyed would not be deductible at all. The problem is, both groups of people are in the same room at the same time. Does the IRS expect you to ask your employees and clients who ate which food, and who actually watched the entertainment, so you can deduct these expenses properly? No guidance has been provided in this area, nor has there been any real definitions of what is considered "lavish and extravagant". If your business does have such an event, the best to do would be keep a tally of the total number of employees and clients that attended and plan on deducting a pro-rated portion of the entertainment costs. For example, if you had 25 employees and 75 clients attending, then deduct 25% of what was spent on entertainment, as your employees comprised 25% of the people viewing the entertainment, and there is no deduction for the other 75%. As far as food and beverages go, if at least half your employees were attending then deduct 25% of the food expense, plus another 50% of the remaining 75% of the food expense. This calculation is a little more complex. Suppose you spent $ 1000 on food and beverages for the aforementioned event. You would deduct $ 250 up front for what your employees presumably consumed, then 50% of the remaining $ 750 spent on what your clients consumed, which would be $ 375. $ 250 plus $ 375 equals $ 625, or 62.5% of what you spent on food and beverages would be deductible.

At the end of the day, it would seem like these policies passed by our Congress ultimately encourages businesses to spend more on their employees and less on their clients. Others might argue that businesses will spend money feeding and entertaining their clients regardless of what the tax rules are, so why give them any kind of deduction (a far cry from the philosophy of the Reagan administration in the 1980s, when meals & entertainment spent on clients was 100% deductible). The fact remains though, without any clients, you would have no business, and thus, no employees. However you feel this policy has affected the way your business operates, it is essential that you properly allocate between the meals & entertainment spent on your clients versus meals & entertainment for your employees, as the IRS will no doubt bring this issue up during an audit of your business.