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Monday June 24, 2024

Washington News

Washington Hotline

Tax Benefits Highlighted For Businesses

On May 3, 2022, the Internal Revenue Service highlighted benefits available during National Small Business Week. The IRS theme for this effort is "Building a Better America Through Entrepreneurship."

A primary benefit for businesses in 2022 is the ability to deduct 100% of the cost of most business–related food and beverage purchases. Previously, the deduction limit was 50% of food and beverage purchases.

A business owner or employee of a business may qualify for this benefit if the food or beverages are purchased from a restaurant and he or she is present at the event. The purchase may not be lavish or extravagant. A restaurant qualifies if it prepares and sells food and beverages for on–premises or off–premises consumption.

However, there are some food and beverage purchases that do not qualify. Purchases from a grocery store or convenience store will not qualify because they are not restaurants. Some employer–operated eating facilities are also not qualified as restaurants. The specific recordkeeping requirements are outlined in IRS Publication 463, Travel, Gift and Car Expenses.

During the pandemic, millions of Americans worked from home. Many business owners continue to work from home and hope that they will qualify for a home office deduction.

This deduction is available if an identifiable portion of the home is regularly used exclusively for business. A business owner with a portion of his or her home used exclusively for a business purpose may deduct expenses with the regular method or the simplified method.

The regular method involves attaching IRS Form 8829, Expenses for Business Use of Your Home, to your tax return. This form enables you to determine the percentage of your personal and business use.

First, your direct business expenses are fully deductible. However, your indirect expenses such as real estate taxes, mortgage interest, rent, casualty losses, utilities, insurance, depreciation, maintenance and repairs must be allocated between personal and business use. You can use Form 8829 to allocate these indirect expenses and calculate the deductible percentage of your home that is used for business purposes.

The simplified method is a 6–line worksheet that is in the Schedule C instructions. This method is available for sole proprietors. You may take a deduction of $5 per square foot for business use, with a maximum deduction of $1,500. The simplified method does not permit you to depreciate the portion of your home used for business. However, you still can take the normal itemized deductions for home mortgage interest, real estate taxes and casualty losses on Schedule A.

You may have some business expenses unrelated to your home. These frequently include advertising costs, supplies and wages paid to employees. These items remain deductible with the simplified method.

If you desire to better understand the regular and simplified method for taking deductions, refer to IRS Publication 587, Business Use of Your Home.

Updated IRS Charitable Deduction Tables

In REG–122770–18, the IRS published new "Actuarial Tables and Valuing Annuities, Interests for Life or a Term of Years, and Remainder or Reversionary Interest."

Under Section 7520, the IRS is required each 10 years to publish new mortality tables that are used to value annuities, interests for life or a term of years and remainder or reversionary interests. The latest tables are based on the 2010 census and are titled "2010CM."

The proposed regulations include the new 2010 CM mortality table and will be effective on the first day of the month after the regulations are made permanent. There is a 60-day comment period that concludes on July 5, 2022. Following that comment period and an opportunity for further IRS review, the final regulations will be promulgated. Deduction calculations on or after the first day of the next month must use the 2010CM mortality table.

Section 7520 generally requires the use of the most recent mortality tables and an interest rate that is 120% of the Federal midterm rate under Section 1274(d)(1) for the month of the valuation. If a charitable contribution is allowable, the taxpayer may elect under Section 7520(a) to use a Federal midterm rate for either of the two months preceding the month before the valuation date.

The actuarial tables based on 2010CM are available at This IRS webpage includes both the existing tables using 2000CM and the new tables. The new tables will update the deduction calculations based on longer life expectancies. The new mortality tables will impact Table S (Single Life Remainder Factors), Table U(1) for unitrust single life factors and Table U(2) for two life unitrust factors.

The proposed regulations include transition rules. If a valuation is completed on or after January 1, 2021 and before the applicable date for the tables as published in final regulations, a donor may elect to use either the 2000CM or 2010CM mortality tables. If a donor passes away during that same period, the election is also permitted. After the final regulations have established the fixed date for the new tables, all deduction calculations thereafter must use the Table 2010CM factors.

If a decedent was under a mental disability, an executor was previously permitted to use the tables effective on the date of the disability to conduct calculations. This rule is now changed. The IRS noted, "A special rule permitting an election to use the interest rate in effect at the time the decedent first became subject to the metal disability is not necessary. The same is true with respect to mortality rates." Therefore, all estates will be required to use the interest rate and mortality table in effect on the date of death.

Editor's Note: The field of philanthropy has been waiting for the tables to be published. Because the IRS is required by law to comply with the comment requirement, it is probable the effective date of the new tables will be during the second half of 2022. With longer expectancies, deductions for life income agreements will generally be lower with the new tables, so few donors will elect to use them before the mandatory date.

Reduced Charitable Deductions with New IRS Tables

When the REG–122770–18 proposed regulations for "Actuarial Tables and Valuing Annuities, Interests for Life or a Term of Years, and Remainder or Reversionary Interest" are made final, the values of charitable deductions for annuity trusts, unitrusts and charitable gift annuities will be lower.

Charitable Remainder 5% Annuity Trust

Trust Funding 2000CM Deduction 2010CM Deduction
80 $100,000 $64,568 $62,111
85 $100,000 $72,898 $71,659
90 $100,000 $79,831 $79,562
80/80 $100,000 $52,693 $50,247
85/85 $100,000 $62,911 $61,652
90/90 $100,000 $71,823 $71,579

Charitable Remainder 5% Unitrust

Trust Funding 2000CM Deduction 2010CM Deduction
80 $100,000 $67,833 $65,805
85 $100,000 $74,846 $73,794
90 $100,000 $80,917 $80,706
80/80 $100,000 $57,755 $55,837
85/85 $100,000 $66,039 $65,017
90/90 $100,000 $73,624 $73,453

Charitable Gift Annuity

Trust Funding 2000CM Deduction 2010CM Deduction
80 $100,000 $53,938 $50,745
85 $100,000 $58,804 $56,922
90 $100,000 $65,308 $64,847
80/80 $100,000 $48,908 $46,267
85/85 $100,000 $51,784 $50,148
90/90 $100,000 $53,790 $53,389

Applicable Federal Rate of 3.0% for May -- Rev. Rul. 2022-9; 2022-18 IRB 1 (17 Apr 2022)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2022. The AFR under Section 7520 for the month of May is 3.0%. The rates for April of 2.2% or March of 2.0% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.

Published May 6, 2022
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