Fed/Cal Differences for Meals Expense

[RealTaxes]

I'm currently working on a 1065 return for a rental property which includes meals expense, and according to the IRS, meals are currently 100% deductible for Federal tax purposes. This is great, however, California does not conform to the bonus deduction.

So now I am trying to show a difference between Fed/Cal for the meals expense, however, I cannot get the California adjustments to show up correctly on California 568 Schedule K Line 2. I need to be able to adjust the amount of the meals expense on the California 8825 to show only half of the meals expense in order for my book and taxable income to tie out.

Does anybody know how to change the meals expense on the California 8825 without changing the expense on the Federal 8825?

[George4Tacks]

It appears to automatically make that adjustment if you enter the meals as "Food or beverage from a restaurant (100%...) in Screen 13. 565 page 4 line 1 shows adjustment and the worksheets shows why.

Are you entering it in Screen 17? Are you confident that it goes there?

[RealTaxes]

Hi George4Tacks,

Screen 13 is used when taking deductions for Ordinary Income, and flows to each partner's K-1 on Line 1. However, since this entity is a Rental, the income and deductions should flow to each partner's K-1 Line 2. It's important to record the correct type of income because Rental Real Estate Income will be treated as passive income at the partner level when they prepare their respective income tax return. I believe that LaCerte needs to add another line to the "State Amounts" section of screen 17 for Meals Expense subject to 100% bonus as it does for Ordinary Income, Amortization, Depreciation & Taxes. 

Thank you for your response!

[George4Tacks]

At the bottom of Screen 17, you can make manual adjustments for CA, with a description.

[RealTaxes]

The options I see on screen 17 for State Amounts are only for Ordinary Income, Amortization, Depreciation & Taxes.

If I make an adjustment here, my California 8825 will not show meals deductions as being 50% deductible. It will either throw off my deductions for Ordinary income, Amortization, Depreciation or Taxes which is not correct.

I also tried to make an adjustment on screen 38 for Rental income, however, this is only for 163(j) interest expense disallowed, and does not adjust the California 8825.

I should also mention that this is an LLC treated as a partnership for tax purposes and we file a California 568.

[George4Tacks]

Give me more detail on what type of meals these are. Business meetings? Meals for workers at job site? ....

I don't see a solution as the rental schedule does not seem to have meals, or the ability to do a state if different adjustment. 

Where is the prior year LLC fee shown as a deduction? Should some of the administrative expenses for managing the rentals be ordinary expenses? 

[RealTaxes]

These are meals for onsite workers, and I believe all income and deductions should be for Rental Real Estate income.

I agree that there is no real solution with this software as of yet.

I submitted an email to support and they responded with " At this time in order to reduce the CA 8825 so that only 50% of the meals is to use the State Amounts section on Screen 17.  This will not change the amount of meals reported as Other expenses, but will change whichever amount is entered in the State Amounts section on the CA 8825." And closed the ticket, which was not very helpful. 

They want me to make an adjustment to some other unrelated expense so that taxable income is ok, but by making these adjustments, my other deductions will be off, and if ever audited, how am I to explain this? 

For LLC Tax, which is nondeductible for California purposes but is deductible for Federal purposes, I can adjust the Taxes under the State Amounts on screen 17, and add a corresponding M-1 adjustment to California only. Cannot do the same for meals expenses unfortunately. 

Is there anyway to escalate this up to someone who can make a change to the software so that I can properly record the deductions for both Fed and Cal?

[mhkdgal]

@RealTaxes    I am having this exact same issue with the 50% disallowed meals deduction on a CA 8825 for rental LLC that files as partnership.    

Just curious if you ever got any additional information on the correct way to report this in Lacerte.

Thanks!