MONEY MANAGEMENTFrom the Virginia Society of Certified Public Accountants - Presented by Dean Knepper, CPA, CFP®
BUSINESS ENTERTAINMENT: WHAT’S DEDUCTIBLE AND WHAT’S NOT
January 27, 2006) — In today’s competitive market, small business owners need to do more than keep a close watch on the bottom line: they need to take steps to improve it. Taking charge of taxes is a good first step. For example, the Virginia Society of CPAs advises small business owners to deduct qualified business entertainment expenses. Here’s how to claim the deductions you deserve:
How to qualify
To be deductible, the entertainment expense must be both an ordinary and necessary expense of your business. An ordinary expense is one that is common and accepted in your business or profession. A necessary expense is one that is helpful and appropriate for your business.
In addition, you must show that entertainment expenses are either “directly related” to or “associated with” your business. To be “directly related,” the entertainment expense must be primarily related to the active conduct of your business, you must engage in business with the person during the entertainment, and you must have had more than a general expectation of getting some business benefit or income in the future.
If your entertainment doesn’t meet the “directly related” test, you may be able to satisfy the “associated with” test. Entertainment is considered “associated with” your trade or business if it directly precedes or follows a substantial business discussion. That means you can take your client to a hockey game and deduct the qualified cost if the business discussion precedes or follows the game. No actual business need come from the meeting just so long as business was discussed. And, it is not required that more time be devoted to business than entertainment in order to qualify for the deduction.
What’s the limit?
Even if you meet all the tests for deducting business meals and entertainment expenses, the amount you may deduct is limited to 50 percent of the cost. Transportation to and from a business meal or entertainment venue is fully deductible.
If you’re an employee with the understanding that you will pay your own expenses without reimbursement, you can add your entertainment expenses to your miscellaneous deductions. Self-employed individuals deduct entertainment expenses as an adjustment to income on Form Schedule C.
When you deduct entertainment expenses such as tickets to theater and sporting events, some limits apply. For example, you can deduct only the face value of tickets. Any amounts in excess of the face value paid to agents or scalpers are not deductible.
If you rent a skybox or other private luxury box for more than one event at the same sports arena in the same year, your deduction is limited to the price of a regular non-luxury box ticket for each seat. When expenses for food and beverage are separately stated, you may deduct those expenses in addition to the amounts allowable for the skybox. Both expenses are subject to the 50 percent limitation.
Prefer to entertain at home? To qualify to deduct the cost of entertaining at home, guests must either be employees or have a business connection — that is, they must be present or potential customers or clients. You may also deduct up to $25 per person per year of the cost of business gifts to clients and customers.
What’s not deductible?
Not all entertainment costs are deductible. Don’t plan on deducting dues paid to country, social or athletic clubs. And be aware that any lavish or extravagant expenses will be disallowed by the Internal Revenue Service (IRS).
Generally, you cannot deduct any expenses for the cost of maintaining and operating facilities used to entertain clients. Examples are hunting lodges, swimming pools, yachts, tennis courts and hotel suites. The disallowance applies to the operating costs of the facility, such as rent, utilities and depreciation. It does not apply to expenses that are deductible without showing a business purpose, such as interest and taxes.
What about records?
CPAs say it’s important to keep good records to substantiate your business entertainment deductions. For every deductible business expense, you must record the date, place, amount, name of customer or client and business discussed. If you have questions, contact your CPA.
The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.
Lifetime Financial Planning, Inc.
Dean Knepper, CPA, CERTIFIED FINANCIAL PLANNER™ professional
2325 Dulles Corner Boulevard, Suite 500, Herndon, Virginia, 20171
208 South King Street, Suite 201, Leesburg, Virginia, firstname.lastname@example.org
Hourly Fee Only | Financial
Planning | Investment
Advice | College Savings Plans | College
Financial Aid |
©2001-2003 Lifetime Financial Planning, LLC, ©2004-2006 Lifetime Financial Planning, Inc. All Rights Reserved