Small Business
Accounting - Entertainment Expenses
There
are limits and restrictions on deducting meal and entertainment expenses. Most
are deductible at 50 percent, but there are a few exceptions. Meals and
entertainment must be "ordinary and necessary" and not "lavish
or extravagant" and directly related to or associated with your business.
They must also be substantiated (see below).
Your
home is considered a place conducive to business. As such, entertaining at home
may be deductible providing there was business intent and business was
discussed. The amount of time that business was discussed does not matter.
Reasonable
costs for food and refreshments for year-end parties for employees, as well as
sales seminars and presentations held at your home are 100 percent deductible.
If
you rent a skybox or other private luxury box for more than one event, say for
the season, at the same sports arena, you generally cannot deduct more than the
price of a non-luxury box seat ticket. Count each game or other performance as
one event. Deduction for those seats is then subject to the 50 percent
entertainment expense limit.
If
expenses for food and beverages are separately stated, you can deduct these
expenses in addition to the amounts allowable for the skybox, subject to the
requirements and limits that apply. The amounts separately stated for food and
beverages must be reasonable.
Deductions
are disallowed for depreciation and upkeep of "entertainment
facilities" such as yachts, hunting lodges, fishing camps, swimming pools,
and tennis courts. Costs of entertainment provided at such facilities are
deductible, subject to entertainment expense limitations.
Dues
paid to country clubs or to social or golf and athletic clubs however, are not
deductible. Dues that you pay to professional and civic organizations are deductible
as long as your membership has a business purpose. Such organizations include
business leagues, trade associations, chambers of commerce, boards of trade,
and real estate boards.
Tip:
To avoid problems qualifying for a deduction for dues paid to professional or
civic organizations, document the business reasons for the membership, the
contacts you make and any income generated from the membership.
Entertainment
costs, taxes, tips, cover charges, room rentals, maids and waiters are all
subject to the 50 percent limit on entertainment deductions.
How Do You Prove
Expenses Are Directly Related?
Expenses
are directly related if you can show:
- There was more than a general expectation of gaining some business benefit other than goodwill.
- You conducted business during the entertainment.
- Active conduct of business was your main purpose.
Record-Keeping and
Substantiation Requirements
Tax
law requires you to keep records that will prove the business purpose and
amounts of your business travel, entertainment, and local transportation costs.
For example, each expense for lodging away from home that is $75 or more must
be supported by receipts. The receipt must show the amount, date, place, and
type of the expense.
The
most frequent reason that the IRS disallows travel and entertainment expenses
is failure to show the place and business purpose of an item. Therefore, pay
special attention to these aspects of your record-keeping.
Keeping
a diary or log book--and recording your business-related activities at or close
to the time the expense is incurred--is one of the best ways to document your
business expenses.
If
you need help documenting business travel and entertainment expenses, don't
hesitate to call us. We'll help you set up a system that works for you--and
satisfies IRS record-keeping requirements.
651-621-5777
www.abataxaccounting.com
