If you are a small business owner or simply an employee with a number of entertainment or travel related expenses, you may be paying too much in taxes. Did you know that whatever you spend when you dine with a client, drive your car to a business meeting, or tip the bellman for taking your bags to your room during a business trip is probably tax deductible?
The Internal Revenue (IRS) code allows you to deduct all "ordinary and necessary" expenses incurred while operating your business. Here's a good guideline for these rather vague terms: An expense is ordinary if it is "common and accepted" in your industry and necessary if it is one that is "helpful and appropriate" to your business. Here is a helpful list of business deductions to consider as you delve into your receipts for this upcoming tax season.
As you may already know, you can deduct some of the costs of operating your car if you use it for business. You may choose from two different methods for business use charges. The first and most common method for deducting business use charges is the standard mileage rate. For 2008, the standard mileage rate is 50.5 cents per mile for January 1, 2008 through June 30, 2008. The rate changes to 58.5 cents per mile for July 1, 2008 through December 31, 2008. The standard mileage rate for 2009 is 55 cents per mile.
The other option is deducting your actual expenses such as gas, oil changes, parking fees, tolls, tires, repairs, preventative maintenance, insurance premiums, and registration fees. If you choose to deduct your actual expenses in the year you start using your car for business, you are making an irrevocable election, meaning you cannot switch to the standard mileage rate in a later year. If you choose the standard mileage method first, you can switch to actual expenses in a later year.
While the standard mileage method yields the higher deduction in most cases, the actual expense method can save you more money if you use a newer car for business. With the actual expense method, you can also deduct the depreciation of the vehicle (see "depreciating vehicles" below). With either method, if you decide to deduct automobile expenses, you must keep a log of your use. Note the date, the miles driven, and the purpose of each trip.
Entertainment and Meal Expenses
Self-employed taxpayers and business owners can deduct 50% of ordinary and necessary business expenses for entertaining a client, customer, or employee as long as:
It is directly related to the business, and business is discussed; or
It is associated with the business, and the entertainment takes place immediately before or after a business discussion.
However, you still have to meet certain criteria to get the deduction. You must show that:
1. The purpose of the entertainment event or outing was to conduct business
2. You engaged in business or discussed business during the entertainment function
3. You expected either income or a business benefit would come of the entertainment
When entertaining for business reasons, it is recommended you write on the receipt or bill the specific purpose of the business meeting. For example, if you take someone out to dinner, be sure to document the date, the amount, the place, the business purpose, and the business relationship. If you hold a party, keep a copy of the guest list, noting the business relationships.
But there are still some types of entertainment that the IRS is not quite ready to recognize, especially if there is a "substantial distraction." For example, the IRS has indicated that non-deductible entertainment includes entertaining guests at a loud nightclub or taking them on a hunting or fishing trip. There may also be distraction if the meeting takes place in a group with others who are not business associates.
The "associated" test is the second test in which you must show:
1. The entertainment activity is associated with conducting your business
2. The entertainment activity is completed directly before or after the substantial discussion of your business
So just what is substantial discussion? According to the IRS, it does not mean that you have to spend your entire meal discussing business. You will not have to spend the entire basketball game shouting over the fans regarding financial figures and the benefits of investing with your stock brokerage firm. It does mean, however, that at some point before or after that basketball game you must have discussed business.
Remember, entertainment expenses can include anything from restaurants and trade association meetings to tickets to sporting events, the theater, or a concert. On the other hand, non-deductible expenses include dues for country clubs as well as golf and athletic club dues. For more information on entertainment expenses, the IRS website provides a thorough list of eligible deductions.
You may also deduct all business trips. Even if you haven't quite embraced gypsy living, living out of a suitcase may have its advantages. Again, as with any deduction, travel expenses must be ordinary and necessary travel away from your business. The IRS will allow you to deduct your trip if it meets two conditions:
1. Your duties must require you to be away from the general area of your regular place of business for substantially longer than an ordinary day's work
2. You need sleep and rest to meet the demands of your work while you are away from home
Whether you are traveling every other week or have a few long trips a year, make sure you hang on to those cab and restaurant receipts. All your expenses are deductible if your trip is entirely business. Travel deductions include everything from taxi, train, or bus fare to the costs of operating and maintaining your vehicle used during business travel. It also includes such expenses as baggage, the shipping of materials, tolls and parking fees, dry cleaning, telephone calls, use of fax machines, and even gratuity or tips.
Travel-related restaurant costs are subject to a 50% deduction limitation. Deductible meal expenses include those incurred while traveling away from home or while entertaining business clients. It doesn't really matter whether the meal is a lavish, multi-course dinner or a fast food breakfast, so long as it is reasonable given your circumstances. The dining deduction may also apply to meals provided at your business location. There are two ways to determine meal deductions: Actual costs or the standard meal allowance. The methods for determining meal expenses can be found on the IRS website.
Of course, your hotel stays are covered so long as your business trip is "overnight or long enough that you need to stop for sleep or rest to properly perform" your job.
Some quick side notes: If you take a trip that combines business and pleasure, you can only deduct travel expenses and business expenses if 50% or more of your trip is devoted to business. And what about taking a friend or spouse on your business trip? Unfortunately, you cannot deduct his or her travel expenses.
As a small business owner, there are a wide variety of other deductions available to help you shrink your tax bill. Other business deductions include:
2. Certain taxes
3. Legal and professional fees
4. Bad debts
8. Employee expenses
9. Donations to business organizations
10. Educational expenses
11. Licenses and regulatory fees
12. Pension plans
Speak with your tax advisor to see what other deductions your company can take advantage of when calculating expenses. For more information on small business expense deductions, visit the IRS website at www.irs.gov.