Pompano Beach, FL—Last week we cautioned jewelers about possible new tax laws taking effect next year that can affect their business. Two in particular warrant immediate attention, before the end of 2021: the Employer Retention Credit (ERC) that has expired, and potential changes in the estate tax exemption.
We asked Steve Merdinger, (image) CPA and managing partner of KMR LLP, a New York-based certified public accounting and advisory firm with many clients in the jewelry industry, to explain some of the key components of these issues.
Ira Bergman: What do jewelers need to do regarding the Employer Retention Credit passed last year?
Steve Merdinger: The House of Representatives passed a trimmed down Infrastructure Bill, known officially as the Infrastructure Investment and Jobs Act. The legislation already passed the Senate and will now be sent to President Biden for his signature.
Though the bill contains very few tax provisions, one significant item that affects many of you is the ERC. The Act effectively ends the Employer Retention Credit program for most employers at the end of the third quarter.
Created in 2020’s CARES Act and expanded (and enhanced) through 2021, the ERC generally provided eligible employers a refundable credit of up to $7,000 of qualified wages per employee per quarter (for 2021). Following this legislation, most employers will only be eligible for the credit on wages through September 30, 2021. Be sure that you have applied for all available credits through September 30 and consider amending applicable tax returns if you have failed to apply when applicable.
Bergman: What changes might be made in the estate tax exemption?
Merdinger: The estate and gift tax exemption of $11.7 million is a historically high amount. It was a temporary increase and is set to expire at the end of 2025—at which time the exemption will revert to $5 million (before required adjustments for inflation).
Various tax proposals put forth in Congress, however, would accelerate that reduction in the exemption amount. While it is not clear whether such proposals would be enacted, if they were the professional consensus estimates the exemption would be lowered to +/- $6 million ($12 million combined with a spouse). We recommend those with significant exemption capacity above those figures (under current law), to consider gifting strategies prior to the end of 2021, enabling you to maximize the use of your current exemption. Otherwise no action on your part would become a “use it or lose it” situation.
It is critical for you to discuss your individual circumstances with a professional to determine what planning you may wish to consider prior to the end of 2021 in order to take advantage of the currently advantageous exemption.
Bergman: What other changes impact jewelers?
Merdinger: We want to again remind you of the deductibility of certain restaurant-provided business meals in 2021 and 2022. As a temporary exception to the 50% limit on deductibility of certain business meals, tax legislation in December 2020 provided for a new 100% deductibility of amounts paid or incurred in 2021 and 2022 for “food or beverages provided by a restaurant” for business purposes.
Under IRS guidance, a restaurant is a business that prepares and sells food and beverages to retail customers for immediate consumption. Restaurants do not include businesses that sell primarily pre-packaged food or beverages (such as grocery stores), nor do they include specialty food stores, liquor stores, drug stores, convenience stores, newsstands, kiosks, or vending machines. Significantly, the IRS indicated that the food or beverages purchased from qualifying restaurants do not need to be consumed at the restaurant; take-out meals would qualify. Under relevant Treasury regulations, the cost of food and beverages generally includes delivery fees, tips, and sales tax.
Note that the general rules for deductibility of business-related meals continue to apply: the food and beverage expense must be business-related, not lavish or extravagant, and the taxpayer or an employee of the taxpayer must be present.