IRA Financial’s Adam Bergman Esq. discusses the 3 Martini Lunch among deductions you can take this year to lower your tax bill, including 100% deduction for business meals at a restaurant, employee retention tax credit and the five-year carry-back on Net Operating Losses.

Now that 2021 is in full swing and we are starting to think of life beyond COVID – we wanted to bring up some noteworthy 2021 tax deductions that you should definitely be aware of that can help you save some money. The 3 martini lunch is back, baby! This means you can finally get a full tax deduction for having business meals. Plus, Mr. Bergman also talks about employee retention credit, the recovery rebate credit and net operating losses in this episode of Adam Talks.

The 3 Martini Lunch

Let’s start by saying this is not a deduction you can take for the 2020 taxable year. The Consolidated Appropriations Act of 2021 (CAA) put into effect the changes that can be taken from January 1, 2021 until December 31, 2022. Beginning this year, the 3 martini lunch is now 100% tax deductible. There have been a lot of changes to this deduction. Most recently, the Tax Cuts and Jobs Act (TCJA) made it so you could only deduct 50% of your meals. It also eliminated the deduction for entertainment.

Back in the day, you could fully deduct your meals and entertainment costs incurred as a result of business activities. In the mid-80’s, changes to the law lowered the deduction to 80% and stated that business discussions must have take place. The TCJA went a step further to reduce the deduction to 50% and eliminated the entertainment aspect. This meant trips to the golf course, a sporting event and other such entertainment was no longer deductible. You could still get a deduction for food and beverage, so long as they weren’t “lavish or extravagant.”

In an effort to bring patrons back to restaurants, The CAA has bumped the deduction back up to 100% for the next two years, as long as your business meal takes place at a restaurant. It states, “food or beverages provided by a restaurant, and paid or incurred before January 1, 2023.” Effectively, for the next two years, the 3 martini lunch is back. So get out there and support your local eateries and get a nice tax break from the IRS!

The Employer Retention Credit

If you are a business owner, the CARES Act introduced the employer retention credit, which gave businesses a tax credit of 50% of qualified employee wages. However, if you received a Payroll Protection Program (PPP) loan, you could not take advantage of this credit. The CAA now allows you to get this credit, even if you received a PPP loan. Of course, there is a caveat – you may not claim this credit on wages paid by a forgivable PPP loan.

Further, the Act also expands the businesses who can take advantage of this credit. Instead of limiting it to businesses under 100 employees, if you have less than 500 employees, you can claim the credit. If your business has 100-500 employees, the credit is limited to qualified wages paid to current employees for the first two quarters of 2021 only. If you have a small business and have been affected financially, you can now receive a tax credit, even if you received a loan.

Unemployment and Recovery Rebate Credit

The CAA also discusses stimulus checks and unemployment benefits received thanks to the CARES Act and other packages. What is taxable and what is not? Stimulus checks received are not taxable. If you received a check from the government because you qualified, you do not owe taxes on that money. However, if you received expanded unemployment benefits, they are taxable on the federal level. However, states vary on whether or not they tax unemployment benefits.

Speaking of stimulus checks, did you fail to receive one, or get less than what you were owed? If you qualified for a government payment, the CAA ensures that you will receive a tax credit, if you did not receive the funds. You can claim the Recovery Rebate Credit when you file your 1040 this year.

Net Operating Losses

Net operating losses (NOL) happen when your business has more tax deductions than taxable income in a given year. The only good thing about losses is that you can use them to offset income from other years. The TCJA made it so you could no longer carry-back your NOLs, however you could carry them forward, but only up to 80% of your taxable income.

The CARES Act allows businesses the incurred losses in 2018, 2019 or 2020, to carry-back those losses up to five years from the year they were incurred. Further, you can now use NOLs to offset 100% of taxable income The losses could be used to reduce your taxable income for the aforementioned years up to 100%.

Net operating losses that arise in 2020 have a five-year carry-back, but the carry-back can be waived. With potentially higher tax rates ahead, it may be more valuable to carry a loss forward, depending on the individual taxpayer’s situation. It’s up to you decide how to deal with an NOL.

Get Your Tax Deductions Now

Mr. Bergman mentions a few more deductions you can look out for as well. Check out the podcast and thanks for listening. As always, you can check out all Adam Talks episodes on SoundCloud. Catch y’all next time!