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If you often give to charity, you’re likely aware that long-term appreciated asset donations—stocks, for example—are more advantageous than cash donations. But in some instances, it may be a better idea to sell those appreciated assets and donate the proceeds instead. 

This is because, for cash donations, adjusted gross income (AGI) limitations on charitable deductions are higher. Additionally, the deduction rules can be different for assets that don’t qualify for long-term capital gain treatment. 

Tax treatments by donation type

If all were equal, it would be ideal to donate long-term appreciated assets directly to charity because you could:

• Enjoy a charitable deduction equivalent to the assets’ fair market value on the date it was gifted (assuming deductions are itemized on your return) 
• Avoid capital gains tax on their appreciation in value 

In this scenario, if you were to sell the assets and donate the proceeds, the resulting capital gains tax could then reduce the tax benefits of the donation. 

But all is not equal. Charitable donations of appreciated assets are typically limited to 30% of the AGI, while cash donations are deductible by up to 60% of the AGI. 

In either case, excess deductions may be carried forward for up to five years. 

Crunch the numbers

If you’re considering donating appreciated assets greater than 30% of your AGI, do the math first. 

Then, determine whether selling the assets, paying the capital gains tax, and donating cash up to 60% of the AGI will result in greater tax benefits during the donation year and the following five years. 

The answer will depend on a number of factors, such as: 

• The size of the gift
• Your AGI in the year that you made the donation
• Your projected AGI in the following five years
• Your ability to itemize deductions during those years 

Making charitable donations? Talk to a tax professional

Before making charitable donations, it’s helpful to discuss your options with a knowledgeable tax advisor. Contact us for assistance making charitable donations with the greatest tax benefits. 

This year new business expense relief is coming from the federal government. Under a new COVID-19 relief provision, the standard 50% deduction for business meal costs has been doubled to 100% for any food and beverages bought at restaurants for 2021 and 2022. 

This increase means the entire cost of customer meetings at your favorite local cafe could qualify as write-offs. Related expenses, such as sales tax, tips, and delivery charges, are also included.

Business meal deduction guidelines

The Tax Cuts and Jobs Act (TCJA) had eliminated the deductions for business entertainment expenses after 2017, but business owners could still enjoy a 50% deduction on qualifying business meals. This tax break included meals while traveling for business or while away from home. 

The motivation behind this latest increase to 100%? To aid restaurant owners who have struggled financially during the past two years because of the pandemic. The Consolidated Appropriations Act is doubling this business meal deduction temporarily. Unless Congress decides to extend this tax break beyond 2021 and 2022, it will sunset on December 31st of this year. 

Currently, the deduction for business meals is allowable under the following circumstances:  

• It is a usual expense your business typically pays to conduct business or trade during the year. 
• The meal can’t be overly extravagant or lavish for any reason. 
• The taxpayer or one of their employees is present at the meal. 
• Only prospective or existing business customers, consultants, clients, or similar business contacts receive the meal. 

If the meal is part of a larger entertainment event, purchase the food and drinks separately or have them itemized on the primary bill. 

As you can see, taking clients out for business meals could qualify for a 100% tax deduction if you follow the guidelines mentioned above. 

Restaurants have to provide the meals

One of the main goals of this deduction is to support restaurants. Guidance also allows purchasing food and beverages from these establishments for immediate consumption or off the premises. This means you can have lunch delivered to your office instead of disrupting a sales meeting to go out to eat. 

Keep in mind that the IRS’s use of the word “restaurant” doesn’t include a business that only offers pre-packaged meals that cannot be eaten immediately on the premises. Specifically, food and beverage sales are excluded from certain companies, such as:

• Convenience stores
• Gas stations
• Grocery stores
• Beer, wine, or liquor stores
• Vending machines or kiosks

If you have an onsite cafeteria at your workplace, these meals are typically excluded from an employee’s taxable income. If you opt to buy business meals from such facilities, you can only claim a 50% deduction. This rule applies even if your food service is operated by a third-party company contracted by your company.  

Maintain detailed expense records

As you would with any other business expense, you should keep detailed records of your business meal costs to ensure maximum tax benefit at the end of the year. 

You should record the below pieces of information:

• Date
• Itemized cost of every expense
• Name and location of the restaurants used
• Business purpose of the meal
• Business relationship of those fed

You should also ask establishments to divide up the tab between entertainment costs and costs for food or beverages. Contact your tax advisor for more information.

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