Entertainment, Meals, and Gift Expenses – Tax Deductible
This can be a confusing area for business owners and is often misunderstood. In an effort to help business owners to plan ahead for the 2014 tax year, the focus will be on entertainment, meals, and gift tax deductible expenses.
The IRS definition of an entertainment expense,
- “Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client.
- An ordinary expense is one that is common and accepted in your trade or business.
- A necessary expense is one that is helpful and appropriate.” (1)
In order for entertainment expenses to be deductible, the entertainment expense must meet one of two qualifying requirements. Per the IRS, the entertainment expense must meet either the directly related test or the associated test (1). The direct test requires that the entertainment either takes place in an obvious business setting or the main purpose of the entertainment was to engage in business activity, the business activity was performed, and the prior expectation was that a benefit/income would be received as a result. If the expense does not meet the direct test requirement, the expense still may be deductible if it meets the associated test. This test requires the expense related to the trade or business and the timing must be directly before or after a “substantial business discussion” (1) Some entertainment expenses are subject to a 50% limit while others are not (1).
Check out the chart on the IRS website, http://www.irs.gov/publications/p463/ch02.html This website also has examples to help tax payers determine what entertainment expenses qualify. Be sure to talk to your company’s tax accountant prior to events to ensure your company can take full advantage of tax deductions available for these expenses.
Often meals are considered to be 50% deductible by business owners. However, this is not always true. Meals associated with an entertainment expense in which a business owner or an employee from the company attend, are considered a form of entertainment (1). In these cases, follow the entertainment rules which may not be limited to the 50% limit.(1) Review the IRS website, http://www.irs.gov/publications/p463/ch02.html#en_US_2013_publink100033880, to determine what items are exempt from the 50% limit. Prior to events, talk to the company’s tax accountant so your company can take full advantage of meal expense deductions.
Gifts given to an individual whether directly or indirectly are limited to a tax deduction of $25 per gift (2). The cost of the gift does not include incidental costs (ex. gift wrapping) (2). Per the IRS, gifts do not include 1) advertisement items that cost $4 or less and 2) have the company’s name permanently engraved/printed and are broadly given out (2). Review the examples given on the IRS website, http://www.irs.gov/publications/p463/ch03.html, for clarity. Gifts to employees are also deductible. These gifts fall under De Minimis Benefits. Some examples include Holiday gifts, occasional parties, and occasional tickets for theater or sporting events (3). The De Minimis gift must be considered to have little value (be sure to include frequency in you calculations) and also cannot be a form of cash (3). For more detail on employee benefits that are deductible review the IRS publication, http://www.irs.gov/publications/p15b/ar02.html#en_US_2014_publink1000193660.
These rules are subject to change. It is important to talk to your company’s tax accountant regularly to avoid missing important tax updates. If possible talk to your tax accountant prior to large expenses to ensure the company is in line with IRS rules for taking advantage of available tax deductions. Otherwise, be sure to clear up any questions regarding these tax expenses as they occur.
The company must be able to support or prove the expenses that are deducted on the tax return (4). When entering these expenses into the accounting program, make sure the transaction descriptions are detailed and clearly state the purpose of the expense. Evidence must also be kept on hand should the IRS request proof of deductions. The IRS defines adequate evidence as showing “the amount, date, place, and essential character of the expense” (4). Review the IRS recordkeeping website, http://www.irs.gov/publications/p463/ch05.html, to make sure the company’s recordkeeping policies are in compliance with the IRS requirements.
Planning ahead now will help to save time and money at the end of the year when the company’s tax return is being prepared. Take time now to review the company’s recordkeeping policies and talk to your tax accountant to clarify the treatment of entertainment, meals, and gift expenses.
1. Internal Revenue Service. Entertainment. IRS. [Online] [Cited: 05 13, 2014.] http://www.irs.gov/publications/p463/ch02.html.
2. —. Gifts. IRS. [Online] [Cited: 05 14, 2014.] http://www.irs.gov/publications/p463/ch03.html.
3. Inaternal Revenue Services. Publication 15-B Main Content. IRS. [Online] [Cited: June 6, 2014.] http://www.irs.gov/publications/p15b/ar02.html#en_US_2014_publink1000193660.
4. Internal Revenue Service. Recordkeeping. IRS. [Online] [Cited: May 14, 2014.] http://www.irs.gov/publications/p463/ch05.html.