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Business owners take charge of tax deductions

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 Tennessee Society of CPAs advises small business owners to deduct qualified business entertainment expenses. Here’s how to claim the deductions you deserve.

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 the 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 textual 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 as 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.

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.

Not all entertainment costs are deductible. Don’t plan on deducting dues paid to country clubs or to social or athletic clubs. And be aware that any lavish or extravagant expenses will be disallowed by the 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. Keep good records to substantiate your deductions. You must record the date, place, amount, name of customer or client and business discussed.

If you have questions, contact your accountant.


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