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Meals and entertainment
Meals for the convenience of the employer
First class travel
Country club expenses
Business Use of a Car - including Travel from a Home Office
Meals and entertainment
Expenditures for meals, entertainment, amusement, and recreation are not deductible unless they are directly related to, or associated with, the active conduct of your business. The IRS also requires you to keep a written or electronic log, made near the time that you make the expenditure, recording the time, place, amount and business purpose of each expense.
Even if you pass those two tests, only 50 percent of meal and entertainment expenses are deductible. If you write-off business meals through your company and there is a proper reimbursement arrangement in place, you won't be charged with any imputed income for the half that is not deductible, but your company will be limited to a 50 percent write-off.
For meal and entertainment deductions, on each credit card receipt, make sure the following are clearly written:
Article on: Meal and Entertainment Expenses
Article on: Business Deductions: Cars, Food & Entertainment
Meals for the convenience of
The meals must be just that: meals. Cash allowances or reimbursements for meals (and lodging for that matter) must be included in gross income by the employee.
The family may join the employee for the meals. §119(a) specifically states that your spouse and other dependents may partake in the free meals.
There are some misunderstandings as to if only c-corporations are allowed this as a deduction or if other entities and self-employed businesses qualify. Also whether "employees" includes owners, partners (§703(a)(2)(E) & §707(a)) , LLC members, managers, shareholders (§1372) and officers can also be subject to debate. Non-employees are not covered (Weeldreyer v. Commissioner; Schmidt v. Commissioner; Tschetter v. Commissioner; Waterfall Farms, Inc. v. Commissioner; Armstrong v. Phinney, 5th Cir., 1968.)
On February 16, 2006 the IRS
identified §119 as an
emerging issue to be addressed.
Tread carefully when deducting "luxury" business expenses Many people are surprised to learn that some "luxury" items can be deductible business expenses. Of course, moderation is key. Excessive spending is sure to attract the IRS's attention. As some recent high-profile court cases have shown, the government isn't timid in its crackdown on business owners using company funds for personal travel and entertainment.
First class travel
As long as your business is turning a profit and is operated legitimately as a business and not a hobby, traveling first class generally is permissible. Even though a coach airline seat will get you to your business appointment just as quickly and an inexpensive hotel room is a place to sleep, the IRS generally won't try to reduce your deduction.
However, if your trip lacks a business purpose, the IRS will deny your travel-related deductions. Don't try to disguise a family vacation as a business trip. Many people are tempted; it's not worth the consequences, especially in today's environment where the IRS is aggressively looking for business abuses. To get around consider making your spouse an bona-fide active owner/officer of your corporation or LLC. Ditto for the kids or other family members. By doing this correctly the trip is not a family trip for pleasure, rather it is an owners' trip for business, and the owners just happy to be related family members. The distinction is an important one.
Overseas conventions definitely get the IRS's attention. If you want to deduct the costs of attending a foreign convention, you have to show that the convention is directly related to your business and it is as reasonable to hold the convention outside North America as within North America.
Some country club costs may be partially deductible if you can show a direct business purpose and you meet some tough written substantiation requirements. These include greens fees as well as food and beverage expenses. They may be deductible up to 50 percent.
If the vehicle is used exclusively for business purposes, you may generally deduct the full cost of operating the vehicle. If you use a vehicle for business on a part-time basis, you will need to allocate your expenses based on your business and personal usage.
But what, exactly, is "business use of a car?" Generally, the IRS classifies all car usage into three categories: business, commuting, and personal. "Business use" generally means travel between two business destinations, one of which may include your regular place of business. Typical travel expenses that are deductible include expenses for:
In addition, if you have a regular place of business, the cost of traveling between your home and a temporary work site that is not the regular place of business is deductible, regardless of the distance traveled. A temporary work site is a place where an individual is realistically expected to perform, and does perform, services for less than a year.
Also, if you do not have a regular place of business and you travel outside of the metropolitan area in which you work to a temporary work site, you are allowed a deduction for your travel costs. Travel within your metropolitan area is not deductible.
Travel from a Home Office
If you are a real estate agent and you maintain your principal place of business in your home, you can deduct the expenses that you incur in traveling between your home and the houses you're trying to sell.
Whether your home is your principal place of business is determined under the same standards that apply to home office deductions. If your home doesn't qualify as your principal place of business, you must follow the general rules in determining whether a particular car trip is sufficiently business-related to be deductible.
Click here for information on depreciation of the vehicle's cost or the optional mileage method
Article on: Business Use of a Car
The tax law limits most deductions for entertainment expenses to 50% of the original cost. In order to qualify as a deduction, all business entertainment need to meet six elements of substantiation. It makes no difference what other types of support you have for your business entertainment; failure to meet the six elements can result in a disallowance.
Substantiation Requirements for All Business
Example: Bill goes to a local
steakhouse alone for dinner. He strikes up a
conversation with the waitress about his real estate
business. His dinner would not be deductible since he
didn’t have a prearranged appointment to meet with her.
Deducting Business Meals
Documentation of a Business Meal: Answering the questions “Who?”, “Where?”, “When?” and “Why?” and recording the cost as shown will give you proper documentation for business meals.
Deducting Associated Entertainment Expenses
By themselves, entertainment expenses for activities
like those above are not deductible.
However, they can be deducted under the “associated
entertainment” rule. Associated
entertainment, also called goodwill entertainment, takes
place in a non-business setting. No business discussion
occurs during the entertainment. The entertainment
precedes or follows a substantial and bona fide business
discussion, usually the same day as
Documentation of a Business Meal Followed by
a Theater Performance
Season Tickets to Events: Season tickets and box seats to theaters and sports events are treated according to the individual events. For example, you hold season theater tickets to attend 10 specific performances during the year. You treat each of the 10 performances separately. The deduction is limited to the printed face value of the ticket.
Business Gifts: Tax law limits your maximum deduction to $25 for business gifts to any one person during a tax year. This limitation applies to gifts of tangible personal property. Husband and wife are treated as one taxpayer for purposes of the $25 limit. However, gifts made to business where there is no single person designated to receive or benefit from the gift, have no limit. There is an alternate rule for gifts of entertainment tickets. You have the choice of treating the gift of a theater ticket either as entertainment or as a business gift. There’s no $25 limit on the entertainment gift. Moreover, when giving tickets as gifts, you need not go along to the entertainment event.
Meals are not entertainment: Gifts of entertainment meals are not allowed. You are entitled to a tax deduction for a business meal only if you are present during the consumption process.
Feed and entertain your spouse: The IRS has a “closely connected” rule. Most spouses qualify as closely connected. The closely connected rule permits deducting the expenses of entertaining your spouse as well as the spouse of a business guest. In other words, if your business guest brings a spouse, you are entitled to bring yours. Of course, you must be entertaining the business guest during the ordinary and necessary course of your business and you must meet the business discussion and documentation requirements.
Deducting Dutch-treat MealsWhen you go to a meal with a business guest, pay your own way and spend more than what you would normally spend, the Dutch-treat rule comes into play. For example, you attend a Chamber of Commerce luncheon meeting and the lunch costs more than you would normally spend for lunch; you may claim the excess as a Dutch-treat business lunch.
Example: You spend $22 at a Chamber luncheon. Had you not gone to the luncheon, you would have spent $2. Your deduction is $10, the excess business cost over your personal cost (times 50%).
The “Sutter Rule”
Document personal meal costs to support your Dutch-treat meals and avoid the “Suffer Rule.”
Method 1: Write down the actual items consumed and determine the cost of each item. Two eggs for breakfast, when a dozen eggs cost $1.20, would cost $0.20. If you need to determine actual costs only a few times during the year, it’s easy to simply write down the actual items consumed.
Method 2 Use actual grocery bills to make an allocation by members of the family. If, for example, the grocery bill for a week amounts to $150, you can estimate the cost for breakfast, lunch, and dinner. If the dinner groceries cost $70, you could divide the $70 by seven days in a week to arrive at $10 for the average dinner. If there are two people in your family, the average cost per person is $5. That would be your cost for purposes of determining your Dutch-treat deductions and maximum disallowance under the Sutter Rule.
Deducting Home Entertainment
Example: You invite the Jones to your home to ask for a referral. You ask for and receive the referral. Even though 90% of the evening is spent on non-business activities, the cost is deductible. If you asked for and failed to get a referral, the cost of entertainment is still deductible.
Your home entertainment deductions are secure when you discuss specific business with your guests. Keep your guest list small; fewer than 12 people. That way you can talk to everyone with whom you need to discuss business.
When you invite more than 12 people to your home, you will be hard pressed to prove to IRS that you had specific business discussions with everyone in attendance. Therefore, you must establish some other type of commercial motivation.
If you entertain a group for the purpose of showing a display of your business products or services, commercial motivation is generally clearly established. When you combine the display of products with an invitation that invites the guests for a specific business reason, you strengthen your case for deductibility.
Example: Tex built his own office building and is looking for tenants. He throws a party for friends that would be desirable tenants. This party would qualify as a deductible business entertainment expense if it meets both of two tests:
Tex’s invitation established the introduction of the new office building as the reason for the party. In the room where the party was held, Tex had photographs of the new building posted on a bulletin board. Although none of the individuals attending the party rented space in the new building, Tex clearly established a clear business motivation for the party.
The expenses are deductible because Tex passes both tests.
Personal Celebrations: Never, never combine a personal event with a business entertainment event. A birthday party for your 10-year-old with business guests in attendance will not fly with IRS. Home entertainment, especially when large groups are involved, is deductible only when you can firmly establish a business purpose. If you have no personal or social relationships with the guests, other than business, your chances for a deduction are improved.
Deducting Employee Meals and Entertainment
Also, meals must be furnished on normal business days.
The reasonable cost of a year-end holiday party or a summer outing for employees and their families is 100% deductible.
Business Club Dues and Lunches: You can deduct dues paid to business clubs when such payment is in the ordinary and necessary course of business. The terms “ordinary” and “necessary” mean that the expenses are customary, usual or normal, and helpful or appropriate. Dues to your local Chamber of Commerce would almost always be appropriate and normal. Dues paid to professional societies are deductible. Trade association dues are deductible if the association’s purpose is the furthering of the business interests of its members. Dues for community clubs organized to attract tourists and new members to your locality give rise to deductible dues.
Note: Meals incurred and “paid for” while talking business at the club are deductible. This limitation only applies to the dues.
Give sales seminars and presentations at home: The tax court has ruled that all food and refreshments served to prospects are 100% deductible if provided at home during a sales seminar or sales presentation.
Business Expense vs. Business Promotion: IRS uses an objective test to determine whether an activity is of a type to constitute entertainment (which is 50% deductible) or more like business promotion (which is 100% deductible). Thus, attending a movie or theatrical performance would normally be considered entertainment. However, it would be deemed promotional, if done so by professional theater critics or movie critics. Similarly, a golf club salesman who plays golf and demonstrates his clubs and other golfing equipment should be able to deduct 100% of his green fees and costs of his golf balls, caddie expense, etc.
Business Entertainment Summary
Last updated: March 16, 2014January 2014
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