Michael Choate Associates CPA

How to Deduct Your Lifestyle — Part II

Meals & Entertainment

South Louisiana is most famous for two things - good food and good times. Many important business relationships are developed and enhanced through delicious meals at great local restaurants or fun times at tailgate parties before the big game.

This article will summarize some of the basic rules and regulations regarding the tax deductions related to meals and entertainment and how to document your activities. In other words, I want to help you deduct your lifestyle!

As a business person, you are allowed to deduct 50% of the costs of business meals and entertainment with customers, vendors, associates, employees, advisors and prospects. First let's review these categories.

Customer - Individuals or company representatives you have sold products or services to in the past.

Vendors - Individuals or company representatives you have bought products or services from in the past.

Associates - Other individuals who are also business owners (i.e. business colleagues).

Employee - Individuals who work for your business and are paid including family members.

Advisors - Bankers, Lawyers, CPAs, etc.

Prospects - Anyone who could potentially buy your product or service.

Business Meals

If you meet with any of these individuals for breakfast, lunch, dinner or cocktails and legitimately discuss your business, you have incurred a business expense. Occasionally, you can meet with immediate family.

Members/employees to discuss business but be careful not to be excessive. Friends and relatives that fall into one of the above categories are eligible for tax-deductible business deductions. Document the meal by recording the date, place, person with whom you meet, the dollar amount spent, and a brief description of the business reason/purpose discussion. Use a documentation system (daytimer and credit card, etc.) or a cash expense log.

Tax Tips: IRS regulations require a written receipt for meals greater than $75. If less than $75, simply log the date, customer name, amount and business purpose.

Entertainment

When you entertain customers, associates, employees, advisors or prospects you can receive a tax deduction of 50% of the actual cost.

Business discussions or meetings must occur directly before, during or after the entertainment event. Business entertainment can include drinks, movies, golf, tennis, country club events (club dues are not deductible), sporting events, hunting and fishing trips, and even parties at home. You can deduct the actual cost of these entertainment events but you must have proper documentation !

Most entertainment can be documented with a credit card receipt (be sure to denote the person entertained). However, entertainment events need more information and explanation as follows: Prepare a summary memo of the event. List each person who attended and how they are related to your business. Also note the general business discussion that occurred and any results (i.e. made a sale or scheduled a follow up appointment).

Tax Alert: No Deduction is generally allowed for any expenses for entertainment facilities, such as yachts, hunting lodges, swimming pools, tennis courts, etc. Certain direct costs of the event are deductible.

Tax Tip:  Company entertainment of employees is 100% deductible. Examples are company Christmas parties, picnics and crawfish boils. Make sure you keep a guest list.

Tax Tip Bonus: If you are an employee, submit expense reports to your employer for reimbursement. Alternatively ask your employer for an expense allowance in lieu of salary if your meals and entertainment are significant. This will save you income and payroll taxes. If you are a business owner, consider adjusting your compensation package to include an expense allowance or reimbursement plan.

In conclusion, your business lifestyle and personal lifestyle often overlap and the differences blur. By documenting the business connection to a seemingly leisure activity, you could increase your tax deductions and minimize your income taxes. And hopefully you can enjoy yourself while helping your business grow and prosper.

For further information on "How to deduct your lifestyle" email mike@choatecpa.com to schedule a convenient appointment to discuss your unique situation.