Are your deductions protected?
Current federal and state tax laws provide for the deductions of meals and entertainment as well as auto expenses used in the regular transaction of business. However, these two items are often abused and can easily be disallowed by the taxing authorities if the proper precautions and procedures are not followed.
Meals and Entertainment:
They are deductible if incurred while traveling on business, or while entertaining a client or employee. The expense must be directly related to or associated with the active conduct of business, such as discussing business with a client directly before, during or after the entertainment or have a reasonable expectation of getting business from a client as a result of the entertainment. And, an employee of the business must be present at the meal or event. Simply giving a customer tickets to a baseball game or concert and not attending yourself, would not be deductable. The taxing authorizes can and will disallow the deduction unless you are able to substantiate the following:
- The amount of the expense
- Date, time and place of the meal or entertainment
- Business purpose, topic of discussion
- People in attendance and relationship to the business
Typically, meals and entertainment are only 50% deductible but are considered 100% deductable under the following conditions:
- Dinner for an employee while working overtime or for the convenience of the employer such as a lunch ordered for a staff meeting.
- Meals provided at or near cost to employees at employer-operated cafeterias.
- Per diems reimbursed to the employee.
Protect your deductions by keeping a detailed log of all your meals and entertainment activity!
It is a common misconception that companies can provide an automobile to their owners and employees to be used for both personal and business purposes and deduct 100% of the expense. This is not the case. Only the business portion of the auto usage is deductible. To claim the deduction one must keep an accurate log of each business trip including; the date of the trip, destination, miles driven, and business purpose. To calculate the amount of deductable auto expense you can use one of the following two methods:
- Method #1 Standard Mile Rate:
Each year the federal government sets a standard reimbursement rate for each mile driven for business purposes. The per mileage rate is designed to encompass the expenses of operating a car such as; fuel, maintenance and repairs, depreciation, insurance and registration. Typically the IRS determines the rate for each year and publishes it in their publication 15, Circular E, the Employer Tax Guide. However, on occasion, the IRS has been known to change the rate mid-year due to skyrocketing gas prices. The deduction is calculated by multiplying the total business miles driven by the published standard rate. To use the standard mileage rate you must choose this method in the first year of operation, then, in later years can switch between the standard mileage rate and actual expense method.
- Method #2 Actual Expenses:
To use the actual expense method, you would maintain records of all expenses associated with your car, such as fuel, maintenance and repairs, insurance, tires, registration. Then, from the business use log that is kept, you would multiple the total cost of operating the auto by the business use percentage. Depreciation on the auto is calculated separately. If you choose the actual expense method in the first year you will have to continue to use this method through-out the life of the auto.
For more information on these topics see IRS publication 463, Travel, Entertainment, Gift and Car Expenses.