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Tax law authors keep changing the game

Jim Hamill

Writing a tax column is made easier because analogies with our tax system can be found anywhere.

Consider the fictional character Charlie Brown. A recurring scene is Lucy pulling a football away from Charlie just as he tries to kick it.

Who would want to be Charlie Brown? Every tax adviser! If you want to be humbled, try to learn the tax law.

Think you have it? Maybe you did, but that’s now past tense because it changed. Congress or the IRS just pulled the football.

Fortunately, clients sometimes benefit from tax advisers landing on their back. I’ll give you two examples.

For 2020, you can deduct 50% of meals and entertainment that satisfy a “directly connected” or “associated with” test for your business. Mere “goodwill,” such as trying to land a new client, is not eligible.

Tax advisers are comfortable with that rule. There are specific substantiation requirements and advisers know how to secure the right proof.

Therefore, Congress changed the rule. However, just for 2021 and 2022. That way, once advisers learn the new rule it can change again.

The supposed reason for the change was to help restaurants suffering from COVID. In 2021 and 2022, 100% of the cost of business meals can be deducted.

Well, that’s simple, you say. Just change 50% to 100%. The increase applies only to meals not to entertainment. Oh, and only to meals provided by a restaurant.

One of my favorite quotes is Humpty Dumpty’s “when I use a word, it means just what I choose it to mean – neither more nor less.” I like this because it explains how laws work. It is not your business to define a word found in a law, it is what the drafter means.

Therefore, what is a “restaurant”? In addition, what is meant by provided “by” a restaurant? Surprisingly, these questions will need to be resolved by regulation before we file 2021 tax returns.

Logic suggests that provided “by” a restaurant does not require that the meal be consumed on premise. On premise seems to be provided “in” a restaurant. That will need to be made clear.

A restaurant seems to have taken on a broad definition. We speak of fast food restaurants. That seems to encompass many establishments. If the increased deduction is to benefit COVID-ravaged restaurants, why not include fast food?

On to the second good thing. The 2017 tax law created “opportunity zones” that could be targets of investment with very attractive tax benefits. Some think too attractive but that’s a different column.

The initial rule allowed someone to invest a capital gain in an opportunity zone within 180 days of realizing that gain, with the result that no tax is paid on that gain until 2026. At the end of 2017 it was expected that the tax benefit would help stimulate investment in these zones.

It took a while for sponsors to develop opportunity zone investments. The sponsors also had to wade through three detailed sets of regulations explaining the structure of the investments.

But things were picking up and I helped several people set up funds to invest in opportunity zones. Then COVID hit. Many development and financing opportunities dried up. So the IRS started a process of extending key dates to qualify for opportunity zone benefits.

The latest extension applies to gains that must be invested between April 1, 2020, and March 31, 2021. The required investment is extended to March 31, 2021.

Let’s say that someone realized a $200,000 capital gain in November 2019. The original rule would require an opportunity zone investment by May 2020. This was first extended to Dec. 31, 2020. Now it is extended to March 31, 2021.

The 2019 return was due by Oct. 15, 2020. The $200,000 gain must have been reported on that return without an investment by the return due date. The taxpayer had until Dec. 31 to make a qualifying investment and amend the 2020 return.

Now the taxpayer has until March 31 to make this investment. That would allow the 2020 return to be amended. The tax adviser could have given correct advise twice, and later been proved wrong twice.

Here’s to Lucy pulling the ball.

Jim Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at