January 17, 2023 By: Michael L. Gentry The construction industry, by its very nature, depends on mobility and getting to where the projects are located, whether that is across a city or region, state, or country. Costs related to mobility are unique and there are various methods of covering or reimbursing your workforce for those costs. The methods you use and your compliance with the related regulations can impact the ultimate cost to your organization as well as your employees and the difference can be significant. The intent of this guidance is to present information you need to analyze which methods provide the best result for your organization as well as some helpful tools to assist with compliance. RECENT CHANGES AFFECTING THE MOBILE WORKFORCE Contractors have faced myriads of tax changes over the past several years. Some of the changes directly impact treatment of business travel, meals, and entertainment for these taxpayers. A recap of the significant changes is detailed below: Restaurant Meals – 100% deductible for 2021 & 2022 The Consolidated Appropriations Act includes a provision allowing for 100% deductibility of restaurant meals paid for or incurred in the years 2021 and 2022. This means that businesses can now deduct the full cost of meals purchased at restaurants, as opposed to the 50% deduction that was previously allowed. The Internal Revenue Service (IRS) issued Notice 2021-25 to clarify which types of businesses qualify as restaurants for the purpose of this deduction. According to the notice, a restaurant is any business that prepares and sells food or beverages to retail customers for immediate consumption. This includes not only traditional restaurants, but also food trucks, cafes, and other similar establishments. Importantly, the food or beverages do not need to be consumed on the premises of the restaurant in order to qualify for the deduction. However, the IRS also noted that businesses that primarily sell pre-packaged food or beverages that are not intended for immediate consumption, such as grocery stores, do not qualify as restaurants under this provision. In other words, if a business sells pre-packaged sandwiches, snacks, or drinks, these purchases would not be eligible for the 100% deduction. In addition to clarifying which businesses qualify for the deduction, the IRS also provided guidance on how to handle the meal portion of per diem expenses in conjunction with the temporary 100% deduction. Specifically, Notice 2021-63 allows taxpayers to treat the meal portion of per diem expenses as 100% deductible if certain substantiation requirements are met. This can be a valuable tool for businesses that provide employees with per diem allowances for meals and other expenses incurred while traveling or working away from home. Overall, the temporary 100% deduction for restaurant meals provides a valuable tax break for businesses that incur these expenses. However, it is important to understand the specific rules and limitations associated with the deduction in order to ensure compliance with IRS regulations. IRS Standard Mileage Rate The Internal Revenue Service (IRS) offers taxpayers the option to use a standard mileage rate to calculate their automobile expenses in specific circumstances. This rate is determined by the IRS before the start of each calendar year and is based on various factors such as fuel costs, vehicle depreciation, and maintenance expenses. For the year 2022, the IRS has set the standard mileage rate at $0.585 cents per mile. This means that taxpayers who use their personal vehicle for business, charitable, medical, or moving purposes may be eligible to deduct their mileage expenses on their tax return using this rate. This can provide a simpler alternative to tracking and deducting actual expenses, such as fuel costs and vehicle maintenance. However, it’s important to note that not all automobile expenses can be calculated using the standard mileage rate. For example, tolls and parking fees must be deducted separately. Additionally, the standard mileage rate cannot be used for vehicles that were previously depreciated using the Modified Accelerated Cost Recovery System (MACRS). It’s also worth mentioning that the standard mileage rate is subject to change throughout the year due to inflation or other factors. In fact, the IRS announced an increase to the standard mileage rate for the latter half of 2022. Starting from July 1, 2022, the rate was raised to $0.625 cents per mile. This increase was based on rising fuel costs and other inflationary pressures on vehicle expenses. This rate will remain in effect until the end of the year, December 31, 2022. Overall, the standard mileage rate can be a useful tool for taxpayers who use their personal vehicle for business or other purposes. However, it’s important to understand the rules and limitations associated with the rate in order to make the most informed decisions about deducting automobile expenses on your tax return. Depreciation Depreciation is an accounting practice that allows businesses to recover the cost of certain assets over time. For contractors, this can include equipment, vehicles, and other fixed assets that are used in their operations. In recent years, the Tax Cuts and Jobs Act (TCJA) has provided a significant tax benefit for contractors by allowing them to take 100% bonus depreciation on new and used fixed assets. The good news is that the 100% bonus depreciation will remain in place for 2022. This means that contractors can continue to take advantage of this tax break to reduce their taxable income and improve their cash flow. However, it’s important to note that starting in 2023, the bonus depreciation will begin to phase out. This means that the percentage of the asset’s cost that can be deducted will gradually decrease from 100% to 80% over the course of three years. For contractors who are considering purchasing new fixed assets, it may be beneficial to do so before the end of 2022 in order to take advantage of the full 100% bonus depreciation. This can help to reduce their tax liability for the year and improve their bottom line. Additionally, purchasing assets in advance can provide contractors with the necessary equipment and resources to complete projects more efficiently and effectively. It’s worth noting that the rules and regulations around depreciation can be complex and can vary depending on the specific circumstances of each business. It’s important for contractors to consult with a qualified tax professional or accountant to ensure that they are complying with all applicable laws and regulations, and to maximize their tax benefits. Overall, while the phase-out of bonus depreciation may be a concern for contractors in the coming years, there are still opportunities to take advantage of this valuable tax break in 2022. By planning ahead and investing in new fixed assets before the end of the year, contractors can position themselves for success and growth in the years to come. Read the document linked below to learn more. 2022_September_Mobile Workforce Whitepaper_KatzAbosch Article by: Michael L. Gentry, CPA, CCIFP, CCA Michael Gentry, a Director with KatzAbosch, joined the firm in 1998. Mike serves on the firm’s Board of Directors and as Co-Chair of the Construction Services Group. He has provided accounting and tax services to contractors and construction firms for more than 15 years. In addition, he services closely-held businesses. A dedicated professional, Mike holds the prestigious distinction of Certified Construction Industry Financial Professional (CCIFP), a certification held by less than 50 professionals in Maryland and less than 1,000 professionals in the United States. He is also a CCA, certified construction auditor. This nationally recognized certification is sponsored by the National Association of Construction Auditors. By applying his knowledge of the latest trends and changes in the construction industry, he helps clients achieve their financial and personal goals.
