Entertainment can be a complex deduction
Taking a customer to lunch, dinner or the theater is part of doing business. And often, a lot of fun. But company owners may find that claiming such entertainment expenses as income tax deductions is complicated, and maybe painful.
Many owners find out when they’re compiling their income tax returns that they can’t deduct the full amount of a meal or event. Maybe they can’t deduct any of it.
IRS Publication 463, Travel, Entertainment, Gift and Car Expenses will give you a good grounding in deductions for entertainment expenses. And, as with any tax matters, it’s always a good idea to consult a tax professional like an accountant or an attorney to be sure you’re following the rules.
Here’s an overview of what the IRS allows, and doesn’t allow, for business entertainment deductions:
• The tax code allows only 50 percent of an entertainment expense to be deducted.
• In order to claim an entertainment deduction, the government requires that the main purpose of a dinner or other form of entertainment be “the active conduct of business.” And an owner must have “more than a general expectation of getting income or some other specific business benefit at some future time.” In other words, if you’re getting together just to network with a client or add some goodwill to the relationship, it might not pass the IRS’ test.
• If you take a customer to the theater or a baseball game, the same rules generally apply. But there can be exceptions. If the ticket is to an event that will benefit a charitable organization – local golf tournaments are often held for charitable reasons – then you can deduct the full amount.
• Many accountants say the biggest problems their clients have with entertainment expenses is that they don’t keep good enough records. Many have a pile of receipts and credit card statements at the end of the year. But that won’t be good enough for the IRS if it questions your deductions. The government and tax professionals recommend that business owners keep a log or diary where they can enter their entertainment expenses.
Tax time draws nigh, so here are sites for cheapskates looking to file without spending a lot on software or preparation.
• Free file: The Internal Revenue Service provides two ways to file tax returns free online. One is for people with adjusted gross income of $58,000 or less. For that group, tax-filing software is available from several vendors at no cost. For those with higher incomes, it’s still possible to file free, but only using the IRS’s “fillable forms,” the electronic versions of IRS paper forms. www.freefile.irs.gov
• Human help: Forbes.com sums up your options for cheap tax filing, including how to get free help from a human, as opposed to websites and software. The IRS runs two such programs, and the AARP Foundation runs another. The article also notes that the brokerage or mutual fund provider where you have an account may offer free access to tax-prep software. go.philly.com/taxes1
• AARP assistance: Here’s a detail page on the AARP Foundation program, called Tax-Aide. Through it you can find nearby locations and hours of assistance. Some of the sites require a reservation. The program also seeks volunteer aides for next year. go.philly.com/taxes2
• Whatever it takes: There’s nothing here about the mechanics of doing your taxes. Instead, this page (go.philly.com/taxes3) at eHow.com attempts to provide motivational tips to get you to sit down and do the math, fill out the form and file.
• State taxes: Consumer Reports provides a list of links to state websites to help taxpayers find out quickly how to file state returns electronically. go.philly.com/taxes4
• Direct deposit: Taxpayers who file electronically and choose IRS direct deposit to a bank account can receive their refund within 10 days.
• Paper refunds: It usually takes up to 14 days for a paper check to be mailed to e-filers; for those filing a paper return, it can take four to six weeks to receive a paper check in the mail.
• Payroll cards: If you already have a payroll card through your employer, you can have your IRS tax refund deposited onto your card.
• Pre-paid debit cards: This year, the U.S. Treasury Department launched a pilot program that lets 600,000 taxpayers who don’t have bank accounts receive their tax refund on a prepaid debit card that can be used anywhere. It’s a trial program available only to those who received a Treasury letter.
• Tax preparer’s debit cards: Companies that prepare your taxes usually offer Visa-type cards that can be loaded with your refund. Tax preparers can also issue refunds by paper check; in both cases, extra charges may apply.