Getting The Full Deduction You Are Entitled To
Did you know that all business expenses don’t yield the same tax benefit? For example, if you spend $100 on office supplies, you can deduct the full expense. If you’re in the 30% tax bracket, the deduction will yield you a tax savings of $30.
On the other hand, look at what happens with “meal and entertainment” (M&E) expenses. If you spend $100 taking a client (or your favorite accountant!) to lunch, do you still get a tax savings of $30? The answer is: NO!!! That’s because most M&E expenses are only 50% deductible! This treatment started approximately thirty years ago. Congress felt that people were getting too good of a deal by getting to deduct the whole expense. They figured “Hey, you have to eat anyway, so why should you get a tax savings for that?” In addition, Congress especially felt that since people were most likely eating at fancy restaurants, you should not get a full deduction!! Interesting, huh? Where do you think Congressmen eat (at taxpayer expense)? So, the change to the tax law turned a $100 lunch expense into only a $50 tax deduction, which results in a tax savings of $15.
This tax treatment brings up a question. What does M&E include? Or, to put it a different way: are all food expenses M&E? You’ll like the answer: No! This means that you’ll be able to deduct 100% of some food expenses, thereby getting a full tax benefit for your expense. The following types of expenditures qualify for 100% deduction:
Travel expenses. Notice that there’s no T in M&E!! Travel expenses (such as airfare, hotels, etc.) qualify for 100% deduction. The confusion comes, I believe, from the old expression “travel and entertainment”, which lumped these two categories together. But for tax purposes, they are treated differently.
Meals brought in to a workplace. An example would be meals provided to attendees of a seminar or working meeting.
Snacks brought in to a workplace. Employers providing candy, popcorn, water bottles, etc. for their customers and employees: Congratulations! You get 100% deduction (and you might have happier employees).
M&E expenses passed on to clients (not that WE would ever do that). But there’s a catch! The invoice to the client must separate these expenses from the rest of the charges. Why? So that the client will only be able to deduct 50% of the expenditure!
Company picnic, holiday party, gifts (such as a turkey for the holidays). Yup, all those get you a 100% deduction. (See below for some more on gifts.)
Food sold to customers. Of course, if you are a restaurant, cafeteria, or the like, the cost of the food sold is 100% deductible.
Provision of meals as a benefit to the community.
Now, don’t forget that in order to deduct ANY of these expenses (50% or 100%) you have to have a business purpose or connection. It is also necessary to document who was in attendance, where the event occurred, the date, why the event occurred (business purpose) and how much was spent.
Also, don’t get too creative! If you consider the expenditure a “gift” to your client it may help or not! Gifts are 100% deductible…but, you can only deduct up to $25 (a limit that hasn’t changed in forever!) per recipient, per calendar year! I wonder what kind of gifts those Senators are receiving.
So, if you want to maximize your tax benefits, set up different accounts for M&E in your accounting records. Have one for 100% deductible expenses and another for those that are only 50% deductible. You’ll come out ahead!!
Any federal tax advice contained in this article is not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer.
Marcelo Sroka – is a Tax Partner at Wertz & Company, LLP, a Professional Services Firm located in Orange County, CA that specializes in working with entrepreneurs along their journey to success.