Wednesday, February 14, 2001
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Wednesday, February 14, 2001 |
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Tips and tactics for deducting business meals and entertainment expenses
Taking customers or clients out to dinner, to a round of golf, or for a night at the theater often makes good business sense. Structuring the meal or entertainment so that it qualifies as a tax-deductible business expense makes even better business sense, says the Georgia Society of CPAs. But before you even think about using the words fun and tax deduction in the same sentence, be sure your business meal and entertainment expenses pass two separate tests. First, to be deductible, the business meal or entertainment expense must meet the requirement of being "ordinary and necessary." An ordinary expense is one that is common and accepted in your business, while a necessary expense is one that is helpful and appropriate to your business. Implied in the phrase "ordinary and necessary" is a level of reasonableness. In the absence of any IRS-issued guidelines, judging expenses as lavish or extravagant is purely subjective, so you'll have to use your best judgment. Flying a group of prospective customers to Paris to preview your new screwdriver is not likely to be looked on favorably by the IRS. Next, the business meal or entertainment expense should also be either "directly related" to or "associated with" the business. To satisfy the directly-related test, the entertainment activity must directly relate to carrying out your business be it developing new business or encouraging the continuation of existing business relationships. In other words, you must actively engage in business during the meal or entertainment event. For example, a catered meeting in your company's conference room for clients would meet the "directly-related" test, as would reserving a hospitality room at a convention. You need not devote more time to business than entertainment in order to satisfy the test, nor are you required to demonstrate that business income or some other business benefit actually resulted from the event. If discussing your company's widgets during the seventh inning stretch isn't your idea of the best way to qualify for the deduction, you may be able to demonstrate that the entertainment expense meets the more easily satisfied "associated with" test. To satisfy the "associated with" test, the entertainment event must have a clear business purpose and must precede or follow a substantial and bona fide business discussion. Business meals and entertainment expenses generally are 50 percent deductible. The cost of getting to the restaurant or entertainment event, however, is 100 percent deductible regardless of whether you travel by car, subway, or limousine. Holiday parties, picnics, and similar events held for employees and their families are 100 percent deductible, provided that they occur infrequently and that everyone at work is invited. Business need not be discussed during these morale-boosting events. When entertaining customers or clients, paying a scalper or ticket broker to secure good seats to a sports or entertainment event may very well impress your client, but don't expect Uncle Sam to help defray the added expense. You may deduct 50 percent of the face value of tickets, but not 50 percent of what you actually paid the scalper. Similarly limited is the deduction for the cost of skyboxes and other private luxury boxes rented for a season or for a series of events such as playoff or championship games. Where the cost covers more than one event, your deduction is limited to 50 percent of the total of the face values of non-luxury box seats times the number of seats in the box. However, if you rent a skybox for just one game, you can deduct 50 percent of the cost of the rental of the entire skybox. There are strict requirements for substantiating your expenses. For each deductible meal and entertainment expense, you must show the date, place, amount, business purpose of the expense, and the business relationship of the person(s) being entertained. It's a good idea to make notes on the back of receipts or in your business planner. If you fail to satisfy IRS reporting requirements, your deduction may be disallowed. Keep in mind that the area of meals and entertainment expenses attracts the attention of the IRS. However, CPAs point out that if you meet the requirements for deductibility and keep accurate and complete records, your deductions should withstand IRS scrutiny. The GSCPA is the premier professional organization for CPAs in the state of Georgia. With over 10,000 members throughout the state, the purpose of the GSCPA is to promote the study of accountancy and applicable laws, provide continuing professional education, maintain high ethical and work standards, and provide information about accounting issues to the membership and the public. For more information, access our web site at www.gscpa.org.
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