Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Understanding the rules of what is deductible and what substantiation is needed will help you prevail if the IRS challenges your deductions.
A deduction is allowed for business meals, entertainment and gifts when the expenses are directly related to the active conduct of the business. To be directly related, you must engage in business discussions during the meal or entertainment activity.
Deductions are also available when the expense is associated with the active conduct of business and directly precedes or follows substantial business discussions. In either case, there must be more than a general expectation of deriving income or some other specific business benefit. Goodwill entertainment with informal business discussions is not deductible.
David is a life insurance agent and frequently has business discussions with existing and potential clients over dinner. He also will dine and discuss practice development ideas with referral sources including his accountant and attorney. David also dines with business contacts, existing clients and friends without having substantial bona fide business discussions during the meals.
The meals in the first two scenarios meet the “directly related” test and are deductible by David. If in the third scenario there are bona fide substantial business discussions immediately preceding or following the meals, David meets the “associated with” test and the costs of the meals are deductible. Otherwise, no deduction is allowed in the third scenario.
Most club dues are not deductible. The types of club dues not allowed are those for country clubs, health clubs, airline clubs and hotel clubs among others—even when the club’s environment is conducive to business and you actually conduct business at the club.
An exception is made to normally allow a deduction for dues paid to professional organizations, chambers of commerce, business leagues, and civic organizations such as Shriners, Rotary Club and Lions Club when there is a business interest in being a member.
Meals and entertainment expenses are generally only 50 percent deductible. The disallowance applies to the total bill, including the portion covering your own meal or entertainment expenses and taxes. Interestingly, the cost of parking at the restaurant or entertainment facility is 100 percent deductible.
Business gifts are deductible when the total gift amount for the year does not exceed $25 per recipient. None of the amount over $25 per recipient is deductible. Advertising gifts costing $4 or less, such as an embossed pen or mug with company logo, do not count toward the $25 ceiling.
Exceptions to the 50 percent disallowance rule allowing a full deduction include:
Generally a deduction is not allowed unless there are adequate records to substantiate the expense. The required substantiation must include:
A separate credit card for the business is often advisable to help segregate personal from business expenses. When a written receipt is required, a credit card statement is not sufficient. An actual receipt from the establishment where the item was purchased is best.
When entering expenses in accounting software, a separate account for 50 percent deductible items can be helpful. In any case, it is important to maintain good records to support the deductions even if tracking them in accounting software.
