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Ready, set, count your inventory
Ready, set, count your inventory 266 266 Lindsay Yeager

When businesses issue audited financial statements, year-end physical inventory counts may be required for retailers, manufacturers, contractors and others that carry significant inventory. Auditors don’t perform the counts themselves, but they observe them to evaluate the accuracy of management’s procedures, verify that recorded quantities exist and assess whether inventory is properly valued.

Why Year-End Inventory Counts Matter for Every Business

Even for businesses that aren’t subject to audit requirements, conducting a physical count is a smart end-of-year exercise. It provides an opportunity to confirm that the quantities in your accounting system reflect what’s actually on the shelves, uncover shrinkage or obsolescence, and pinpoint any weaknesses in your internal controls. Regular counts also support better purchasing decisions, more accurate financial reporting and improved cash flow management — making them a valuable exercise for companies of any size. Here are some best practices to help you prepare and maximize the benefits.

Streamlining the process

Planning is critical for an accurate and efficient inventory count. Start by selecting a date when active inventory movement is minimal. Weekends or holidays often work best. Communicate this date to all stakeholders to ensure proper cutoff procedures are in place. New inventory receipts or shipments can throw off counting procedures.

In the weeks before the counting starts, management generally should:

  • Clean and organize stock areas,
  • Order (or create) prenumbered inventory tags,
  • Prepare templates to document the process, such as count sheets and discrepancy logs,
  • Assign workers in two-person teams to specific count zones,
  • Train counters, recorders and supervisors on their assigned roles,
  • Preview inventory for potential roadblocks that can be fixed before counting begins,
  • Write off any defective or obsolete inventory items, and
  • Count and seal slow-moving items in labeled containers ahead of time.

External Audit Teams and Their Role in Inventory Procedures

If your company issues audited financial statements, one or more members of your external audit team will observe the procedures (including any statistical sampling methods), review written inventory processes, evaluate internal controls over inventory, and perform independent counts to compare to your inventory listing and counts made by your employees.

Handling discrepancies 

Modern technology has made inventory counting far more efficient. Barcode scanners, mobile devices and radio frequency identification (RFID) tags reduce manual errors and speed up the process. Linking these tools to a perpetual inventory system keeps your records updated in real time, so what’s in your system more closely aligns with what’s on your shelves. However, even with automation, discrepancies can still happen.

When your books and counts don’t sync, quantify the magnitude of any inventory discrepancies and make the necessary adjustments to your records and financial statements. Evaluate whether your valuation and costing methods remain appropriate; if not, update them to ensure consistency and accuracy going forward.

Cycle Counts: A Proactive Approach to Accuracy

Resist the temptation to simply write off the difference and move on. Instead, investigate the root causes, such as human counting errors, system data issues, mislocated items, theft, damage or obsolescence. Use the results to strengthen controls and processes. Possible improvements include revising purchasing and shipping procedures, upgrading inventory management software, installing surveillance in key areas, securing high-risk items, and educating staff on proper inventory handling and reporting procedures.

Also consider ongoing cycle counts that focus on high-value, high-turnover items to help detect issues sooner and reduce year-end surprises. For companies that issue audited financials, cycle counts complement — but don’t replace — year-end physical count requirements.

Formally documenting the inventory counting process, findings and outcomes helps management learn from past mistakes. And it provides an important trail for auditors to follow.

For more information

Physical inventory counts can enhance operational efficiency and financial reporting integrity. With the help of modern technology and advanced preparation, the process can be less disruptive and more valuable. When discrepancies arise, management needs to act decisively and systematically. Contact a Smolin Representative for guidance on complying with the inventory accounting rules and optimizing inventory management.

New itemized deduction limitation will affect high-income individuals next year
New itemized deduction limitation will affect high-income individuals next year 266 266 Lindsay Yeager

Beginning in 2026, taxpayers in the top federal income tax bracket will see their itemized deductions reduced. If you’re at risk, there are steps you can take before the end of 2025 to help mitigate the negative impact.

The New Limitation Up Close

Before the Tax Cuts and Jobs Act (TCJA), certain itemized deductions of high-income taxpayers were reduced, generally by 3% of the amount by which their adjusted gross income exceeded a specific threshold. For 2018 through 2025, the TCJA eliminated that limitation. The One Big Beautiful Bill Act (OBBBA) makes that elimination permanent, but it puts in place a new limitation for taxpayers in the 37% federal income tax bracket.

Reduced Itemized Deductions for Top Earners

Specifically, for 2026 and beyond, allowable itemized deductions for individuals in the 37% bracket will be reduced by the lesser of: 1) 2/37 times the amount of otherwise allowable itemized deductions or 2) 2/37 times the amount of taxable income (before considering those deductions) in excess of the applicable threshold for the 37% tax bracket.

For 2026, the 37% bracket starts when taxable income exceeds $640,600 for singles and heads of households, $768,700 for married couples filing jointly, and $384,350 for married taxpayers filing separately.

Generally, the limitation will mean that the tax benefit from itemized deductions for taxpayers in the 37% bracket will be as if they were in the 35% bracket.

Some Examples

The reduction calculation is not so easy to understand. Here are some examples to illustrate how it works:

Example 1: You have $37,000 of otherwise allowable itemized deductions in 2026. Before considering those deductions, your taxable income exceeds the threshold for the 37% federal income tax bracket by $37,000.

Your otherwise allowable itemized deductions will be reduced by $2,000 (2/37 × $37,000). So, your allowable itemized deductions will be $35,000 ($37,000 − $2,000). That amount will deliver a tax benefit of $12,950 (37% × $35,000), which is 35% of $37,000.

Example 2: You have $100,000 of otherwise allowable itemized deductions in 2026. Before considering those deductions, your taxable income exceeds the threshold for the 37% bracket by $1 million.

Example Calculation of the Deduction Reduction

Your otherwise allowable itemized deductions will be reduced by $5,405 (2/37 × $100,000). So, your allowable itemized deductions will be $94,595 ($100,000 − $5,405). That amount will deliver a tax benefit of $35,000 (37% × $94,595), which is 35% of $100,000.

Tax Planning Tips

Do you expect to be in the 37% bracket in 2026? Because the new limitation doesn’t apply in 2025, you have a unique opportunity to preserve itemized deductions by accelerating deductible expenses into 2025.

For example, make large charitable contributions this year instead of next. If you aren’t already maxing out your state and local tax (SALT) deduction, you may be able to pay state and local property tax bills in 2025 instead of 2026. And if your medical expenses are already close to or above the 7.5% of adjusted gross income threshold for that deduction, consider bunching additional medical expenses into 2025.

Strategies to Minimize the 2026 Deduction Limitation

In addition, there are steps you can take next year to avoid or minimize the impact of the itemized deduction reduction. These will involve minimizing the 2026 taxable income that falls into the 37% bracket (or even keeping your income below the 37% tax bracket threshold). There are several potential ways to do this. For instance:

  • Recognize capital losses from securities held in taxable brokerage accounts.
  • Make bigger deductible retirement plan contributions.
  • Put off Roth conversions that would add to your taxable income.

Tax Planning for Pass-Through and Sole Proprietorships

If you own an interest in a pass-through business entity (such as a partnership, S corporation or, generally, a limited liability company) or run a sole-proprietorship business, you may be able to take steps to reduce your 2026 taxable income from the business.

Will you be Affected?

If you expect your 2026 income will be high enough that you’ll be affected by the new itemized deduction limitation, contact a Smolin Representative. We’ll work with you to determine strategies to minimize its impact to the extent possible.

New deduction for QPP can save significant taxes for manufacturers and similar businesses
New deduction for QPP can save significant taxes for manufacturers and similar businesses 266 266 Lindsay Yeager

The One Big Beautiful Bill Act (OBBBA) allows 100% first-year depreciation for nonresidential real estate that’s classified as qualified production property (QPP). This new break is different from the first-year bonus depreciation that’s available for assets such as tangible property with a recovery period of 20 years or less and qualified improvement property with a 15-year recovery period. Normally, nonresidential buildings must be depreciated over 39 years.

What is QPP?

The statutory definition of QPP is a bit complicated:

  • QPP is the portion of any nonresidential real estate that’s used by the taxpayer (your business) as an integral part of a qualified production activity.
  • A qualified production activity is the manufacturing, production or refining of a qualified product.
  • A qualified product is any tangible personal property that isn’t a food or beverage prepared in the same building as a retail establishment in which the property is sold. (So a restaurant building can’t be QPP.)

In addition, an activity doesn’t constitute manufacturing, production or refining of a qualified product unless the activity results in a substantial transformation of the property comprising the product.

To sum up these rules, QPP generally means factory buildings. But additional rules apply.

Meeting the placed-in-service rules

QPP 100% first-year depreciation is available for property whose construction begins after January 19, 2025, and before 2029. The property generally must be placed in service in the United States or a U.S. possession before 2031. In addition, the original use of the property generally must commence with the taxpayer.

There’s an exception to the original-use rule. The QPP deduction can be claimed for a previously used nonresidential building that:

  1. Is acquired by the taxpayer after January 19, 2025, and before 2029,
  2. Wasn’t used in a qualified production activity between January 1, 2021, and May 12, 2025,
  3. Wasn’t used by the taxpayer before being acquired,
  4. Is used by the taxpayer as an integral part of a qualified production activity, and
  5. Is placed in service in the United States or a U.S. possession before 2031.

Also, the IRS can extend the before-2031 placed-in-service deadline for property that otherwise meets the requirements to be QPP if an Act of God (as defined) prevents the taxpayer from placing the property in service before the deadline.

Pitfalls to watch out for

While potentially valuable, 100% first-year deprecation for QPP isn’t without pitfalls:

Leased-out buildings. To be QPP, the building must be used by the taxpayer for a qualified production activity. So, if you’re the lessor of a building, you can’t treat it as QPP even if it’s used by a lessee for a qualified production activity.

Nonqualified activities. You can’t treat as QPP any area of a building that’s used for offices, administrative services, lodging, parking, sales activities, research activities, software development, engineering activities or other functions unrelated to the manufacturing, production or refining of tangible personal property.

Ordinary income recapture rule.

If at any time during the 10-year period beginning on the date that QPP is placed in service the property ceases to be used for a qualified production activity, an ordinary income depreciation recapture rule will apply.

IRS guidance expected

QPP 100% first-year depreciation can be a valuable tax break if you have eligible property. However, it could be challenging to identify and allocate costs to portions of buildings that are used only for nonqualifying activities or for several activities, not all of which are qualifying activities. Also, once made, the election can’t be revoked without IRS consent. IRS guidance on this new deduction is expected. Contact a Smolin Representative with questions and to learn about the latest developments.

Is your accounting software working for your business or against it?
Is your accounting software working for your business or against it? 266 266 Lindsay Yeager

When buying new accounting software or upgrading your existing solution, it’s critical to evaluate your options carefully. The right platform can streamline operations and improve financial reporting accuracy. However, the wrong one can result in reporting delays, compliance risks, security breaches and strategic missteps. Here are some common pitfalls to avoid.

Relying on a generic solution

You might be tempted to choose a familiar, off-the-shelf software product. While this may seem like a practical solution, if the software isn’t tailored to your company and industry, you may be setting yourself up for inefficiencies and frustration later.

For example, construction firms often need job costing, progress billing and retainage tracking features. Not-for-profits need fund accounting and donor reporting features. Retailers may benefit from real-time inventory management and multi-channel sales integrations. Choosing a one-size-fits-all tool may result in a patchwork of manual fixes and workarounds that undermine efficiency and add risk.

Overspending or underspending

Accounting systems vary significantly in their features and costs. It’s easy to overspend on software with flashy dashboards and advanced add-ons — or to settle on a no-frills option that doesn’t meet the organization’s needs. Both extremes carry risk.

The ideal approach lies somewhere in the middle. Start by benchmarking your transaction volume, reporting complexity, staff skill levels and support infrastructure. Then build a prioritized feature “wish list” and set a realistic budget. Avoid paying for functions you’ll never use, but don’t underinvest in critical capabilities, such as automation, scalability or integration. Think strategically about where your business will be a year or two from now — not just today.

Clinging to legacy tools

Upgrading or moving to a new accounting platform is a major undertaking, so it’s easy to put these projects on the back burner. But waiting too long can lead to inefficiencies, data inaccuracies and missed opportunities. Modern platforms offer cloud-based access, AI-driven automation and mobile functionality — features that older systems can’t match. As more businesses shift to hybrid work and remote collaboration, staying current is essential for accuracy and speed.

If your financial closes take too long, if reports don’t reconcile easily or if you can’t view your numbers in real time, it may be time to modernize. Treat accounting software upgrades as part of ongoing business improvement — not an occasional “big project.”

Periodic Testing for Smarter Financial Decisions

Test your system periodically to ensure efficient data flows, accurate reconciliations and useful management reports. This exercise moves you from merely “keeping books” to driving financial insight.

Ignoring integration, mobility and security

In the past, accounting software was a standalone application, and data from across the company had to be manually entered into the system. But integration is the name of the game these days. Your accounting system should integrate with the rest of your tech suite — including customer resource management (CRM), inventory and project management platforms — so data can be shared seamlessly and securely. If you’re manually entering data into multiple systems, you’re wasting valuable resources.

Also consider the availability and functionality of mobile access to your accounting system. Many solutions now include apps that allow users to access real-time data, approve transactions and record expenses from their smartphones or tablets.

Prioritize Security in Your Accounting Systems

Equally important is cybersecurity. With financial information increasingly stored online, prioritize systems with data encryption, secure cloud storage and multi-factor authentication. Protecting your data means protecting your business reputation.

Leaving your CPA out of the loop

Choosing the right accounting software isn’t just an IT project — it’s a strategic investment decision for your business. Our team has helped hundreds of companies select accounting technology tools that fit their needs. Let’s get started on defining your requirements, evaluating software features and rolling out a seamless implementation plan. Contact a Smolin Representative to discuss your pain points, training needs and budget. We can help you find a solution that works for your business.

  • Noelle Merwin
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Members of the “sandwich generation” face unique estate planning circumstances
Members of the “sandwich generation” face unique estate planning circumstances 1200 1200 Noelle Merwin

Members of the sandwich generation — those who find themselves simultaneously caring for aging parents while supporting their own children — face unique financial and emotional pressures. One critical yet often overlooked task amid this juggling act is estate planning.

How can you best handle your parents’ financial affairs in the later stages of life? Consider incorporating their needs into your estate plan while tweaking, when necessary, the arrangements they’ve already made. Let’s take a closer look at four critical steps.

  1. Make cash gifts to your parents and pay their medical expenses

One of the simplest ways to help your parents is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion. For 2025, you can give each parent up to $19,000 without triggering gift taxes or using your lifetime gift and estate tax exemption. The exemption amount for 2025 is $13.99 million.

Plus, payments to medical providers aren’t considered gifts, so you can make such payments on your parents’ behalf without using any of your annual exclusion or lifetime exemption amounts.

  1. Set up trusts

There are many trust-based strategies you can use to assist your parents. For example, if you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.

Another option is to set up trusts during your lifetime that leverage your $13.99 million gift and estate tax exemption. Properly designed, these trusts can remove assets — together with all future appreciation in their value — from your taxable estate. They can provide income to your parents during their lives, eventually passing to your children free of gift and estate taxes.

  1. Buy your parents’ home

If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home’s equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses.

To avoid negative tax consequences, pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.

  1. Plan for long-term care expenses

The annual cost of long-term care (LTC) can easily reach six figures. Expenses can include assisted living facilities, nursing homes and home health care.

These expenses aren’t covered by traditional health insurance policies or Social Security, and Medicare provides little, if any, assistance. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.

Don’t forget about your needs

As part of the sandwich generation, it’s easy to lose sight of yourself. After addressing your parents’ needs, focus on your own. Are you saving enough for your children’s college education and your own retirement? Do you have a will and power of attorney in place for you and your spouse?

With proper planning, you’ll make things less complex for your children so they might avoid some of the turmoil that you could be going through.

If you have questions about estate planning strategies tailored to the needs of the sandwich generation, reach out to your Smolin advisor.

  • Noelle Merwin
  • No Comments

What 2025 Business Tax Changes Mean for You
What 2025 Business Tax Changes Mean for You 1200 1200 Noelle Merwin

Every year, tax-related limits for businesses are adjusted for inflation, and for 2025, many of these limits have increased. However, with inflation cooling down, the increases aren’t as significant as they’ve been in recent years. Here’s a rundown of the changes that might impact you and your business.

2025 deductions compared with 2024

  • Section 179 expensing
    • Limit: $1.25 million (up from $1.22 million)
    • Phaseout: $3.13 million (up from $3.05 million)
    • For certain heavy vehicles: $31,300 (up from $30,500)
  • Standard mileage rate for business driving. 70 cents per mile up from 67 cents
  • Income-based phaseouts for certain limits on the Sec. 199A qualified business income deduction begin at:
    • Married filing jointly: $394,600 (up from $383,900)
    • Other filers: $197,300 (up from $191,950)

Retirement plans in 2025 vs. 2024

401(k) contributions

  • Employee Contributions: $23,500 (up from $23,000)
  • Catch-Up Contributions: $7,500 (unchanged)
  • Catch-Up for Ages 60–63: $11,250 (new for 2025)

Employee contributions to SIMPLEs

  • Employee contributions: $16,500 (up from $16,000)
  • Catch-Up contributions: $3,500 (unchanged)
  • Catch-Up for ages 60–63: $5,250 (new for 2025)

Defined contribution plans

  • Combined employer/employee contributions: $70,000 (up from $69,000)
  • Maximum compensation used: $350,000 (up from $345,000)

Defined benefit plans

  • Annual benefit: $280,000 (up from $275,000)

Compensation limits for highly compensated or key employees

  • Highly compensated: $160,000 (up from $155,000)
  • Key employee: $230,000 (up from $220,000)

These increases mean more opportunities for contributions and potential tax savings in 2025.

Social Security tax in 2025 vs. 2024 

Cap on earnings subject to tax: $176,100 (up from $168,600 in 2024)

Qualified transportation fringe benefits: $325/month (up from $315)

Health Savings Account contributions:

  • Individual coverage: $4,300 (up from $4,150)
  • Family coverage: $8,550 (up from $8,300)
  • Catch-up contribution: $1,000 (unchanged)

Flexible Spending Account contributions:

  • Health Care FSA: $3,300 (up from $3,200)
  • Health Care FSA rollover: $660 (up from $640, if plan allows)
  • Dependent Care FSA: $5,000 (unchanged)

Potential upcoming tax changes

These are just a few of the tax limits and deductions that might affect your business in 2025. But there’s more to watch out for. With President Trump back in office and Republicans controlling Congress, several proposed tax changes could be on the horizon.

For example, Trump has suggested lowering the corporate tax rate (currently at 21%) and eliminating taxes on overtime pay, tips, and Social Security benefits. These and other potential changes could have significant impacts on both businesses and individuals.

It’s important to stay informed and reach out to your Smolin advisor to find out how these changes might affect you.

what-to-know-before-donating-appreciated-assets-to-charity

What to Know Before Donating Appreciated Assets to Charity
What to Know Before Donating Appreciated Assets to Charity 1600 941 smolinlupinco

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. 

5-tips-to-prepare-for-year-end-inventory-counts

5 Tips to Prepare for Year-End Inventory Counts
5 Tips to Prepare for Year-End Inventory Counts 1600 941 smolinlupinco

The end of the year is approaching fast. For many, this means time for a physical year-end inventory count—the best way to ensure an accurate amount reported in your company’s perpetual inventory system.

Physical counts may seem tedious and time-consuming, but they can offer valuable insight into your company’s operational efficiency. Fortunately, there are some ways to streamline the process. 

Preparing for your inventory count

Follow the five tips listed below to increase the efficacy of your year-end inventory count. 

1. Use numbered inventory tags

Many companies use two-part tags to count their inventory: one to stay with the item on the shelf, and the other to be returned to the manager following the count. To ensure that the manager can account for every tag issued, use a tagging system to avoid double-counting or omitting items. 

The best way to do this is to number your tags sequentially—whether you order pre-numbered tags or create them yourself is up to you. Either way, you’ll want the tags to be numbered and ready to go well before the count is scheduled to begin. 

2. Preview your inventory

For an efficient inventory count, many companies do a test run a few days before the actual count. This helps to identify and correct any foreseeable problems (such as missing part numbers, unbagged supplies, and insufficient inventory tags). It also helps you determine how many workers to schedule for the project. 

3. Assemble counting teams

To avoid fraudulent counts, it’s helpful to assemble and assign teams to specific areas of the warehouse. (A map often helps workers identify count zones.) Additionally, avoid giving workers inventory listings to reference—encourage them to bring any possible discrepancies to attention rather than duplicating the amount from the listing. 

4. Write off unsaleable items 

If you already know that certain items are going to be written off, such as defective or obsolete items, be sure to dispose of them properly before the inventory count begins. 

5. Pre-count select items

If possible, take some time to pre-count items that aren’t expected to be used before year-end, complete with tagging and storing. If you notice a broken seal on the day of the actual count, those items should be recounted.

Value of inventory

Under the U.S. Generally Accepted Accounting Principles (GAAP), inventory is recorded at cost or market value—whichever is lower. That said, estimating the market value of inventory may require subjective judgment calls. It can be especially difficult to objectively assess the value of work-in-progress inventory, especially when it includes overhead allocations and percentage of completion assessments. 

Because the value of inventory is constantly fluctuating as work is performed and items are shipped and delivered, the best way to capture a static value is to “freeze” operations while the count takes place. This could involve counting inventory during off hours or breaking down counts by physical location. 

External auditors

If your company issues audited financial statements, at least one member of your external audit team will observe the physical inventory count. 

The auditor’s roles include: 

  • Observing procedures, including statistical sampling methods
  • Reviewing written inventory processes
  • Evaluating internal controls over inventory
  • Performing independent counts for comparison
  • Looking for obsolete, broken, or slow-moving items that should be written off

Be prepared to provide your auditors with invoices and shipping/receiving reports, which will be used to evaluate cutoff procedures and confirm reported values. 

Work with an advisor

If you’re concerned about your physical inventory counting procedures, our advisors can help you get it right, including investigating any discrepancies between your inventory count listing and the amount reported in your perpetual inventory system.

Contact us to get started. 

remember-fully-deduct-business-meals

Don’t Forget to Fully Deduct Business Meals in 2022
Don’t Forget to Fully Deduct Business Meals in 2022 1600 941 smolinlupinco

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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