Charles Blair, DDS
John McGill, MBA, CPA, JD
Once or twice a month, our office runs "over" at lunch. Since the employees do not have time to leave the premises for lunch, I usually order lunch for all employees, including myself. My accountant now tells me that, under a new law, these meals can be fully deducted. Is he right?
He is correct. As a general rule, doctors can deduct only 50 percent of amounts spent on meals and entertainment. However, there are two important exceptions that allow full deductibility.
The Tax Court recently ruled that, under Section 274(n)(2)(B), a practice could fully deduct meals furnished on the business premises to employees on duty if the value of those meals were excludable by employees as a de minimus fringe benefit under Section 132(e).
The 1998 Tax Act amended Section 119 of the Internal Revenue Code. It provides that all meals for employees on the business premises will be treated as furnished for the convenience of the employer, and excluded from the employees` gross income, when more than half of the employees furnished meals qualify for this treatment.
In your situation, this should allow full deductibility, since the sole purpose of providing the meals to employees is to maintain practice production, and clearly is for the convenience of the employer.
Doctors also should note a second important exception that provides full deductibility. Under Section 274(n)(4), recreational or social expenses incurred primarily for the benefit of the employees also are fully deductible. Accordingly, meals for staff meetings or staff outings, including holiday functions, should continue to be 100-percent deductible under the new tax law.
Last year, I was audited for my 1995 federal income-tax return. During this audit, the IRS disallowed approximately $30,000 of business expenses on my Schedule C and requested an additional $12,000 in income taxes, not counting interest and penalties. While we were able to reduce the total tax liability to $10,000 on appeal, the interest will add another $2,000 or so to the bill. Is this interest tax deductible?
A recent case held that interest paid on a federal income-tax deficiency arising from an adjustment to a Schedule C should be properly allocable to business indebtedness and, thus, 100-percent deductible. In Redlark v. Commissioner 106 T.C. 2, the Tax Court concluded that the 1986 tax-law change providing for nondeductibility of personal interest did not make any substantive changes in the earlier case law.
The court reviewed the earlier decision of Standing v. Commissioner 28 T.C. 789 (1957), which held that interest on a federal income-tax deficiency resulting from improper reporting of income by a sole proprietor was deductible as business expense. In doing so, the court expressly invalidated Temporary Regulation Section 1.1163-9T providing that personal interest included interest on underpayments on individual income taxes, at least with respect to the portion arising from a doctor`s Schedule C.
I was divorced last year and have changed the beneficiary in my will. Do I need to do this on my retirement plan and IRA forms?
It is imperative that you not only change your will, but also your retirement plan and IRA beneficiary forms. Unless your retirement-plan beneficiary designation forms are changed, the court may require these funds to be paid to your ex-wife, rather than to any other beneficiaries that you may desire, regardless of what your divorce or will may otherwise provide.
Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217 or call (704) 523-5882.