Business owners get a gift from the government when they celebrate the holidays with employees and customers: tax deductions!
Parties, dinners and gifts are all deductible expenses. There is a bit of Uncle Scrooge, though, in Uncle Sam. There are limits on how much you can deduct.
ENTERTAINING CLIENTS AND CUSTOMERS
The government has a 50 percent limit on the amount you can deduct for taking clients or customers out to dinner or to events like a Lakers game or Broadway show. It has another rule that says the main purpose of the dinner or event must be “the active conduct of business.” And that as a result of the event, “you had more than a general expectation of getting income or some other specific benefit at some future time.”
So, technically, if you got together with a client or customer just to foster a good relationship but you didn’t discuss a specific project or contract, the occasion isn’t deductible.
Of course, if you’re at the theater, it’s pretty hard to seal that deal. But the government does allow deductions for events that are directly before or after what the IRS calls a substantial business discussion. So if you talk about that contract at dinner and then see a show, the entire evening is deductible.
Be aware though, the government isn’t going to allow you to deduct the cost of a meal or event that’s considered lavish. What is lavish? The IRS says the cost of a meal or event must be “reasonable based on the facts and circumstances.” A $200 dinner bill in Manhattan may not be lavish, but it might be in a small town in the Midwest.
Very often a business owner and client will bring spouses along for a dinner. The IRS won’t allow their meals to be deducted unless you can show there was a clear business purpose for including them.
What if you throw a party for a group of clients or customers? It won’t be deductible unless you have a meeting before or after and do some serious business talking. For example, give an in-depth sales pitch about your new product or service.
The IRS has detailed explanations of the rules about deducting meals and entertainment in its Publication 463, Travel, Entertainment, Gift and Car Expenses. You can download it from the IRS website, www.irs.gov.
PARTY WITH YOUR STAFFERS
Put on a party for your employees or take them out to dinner, and you get to deduct the entire amount. If their spouses, partners and children are there, it’s still fully deductible.
The IRS says in its Publication 535, Business Expenses, that such events must be company-wide and not just for your inner circle of highly paid top managers. The IRS defines highly paid employees as those with at least a 10 percent stake in the company or who earned more than $105,000 last year.
Invite customers or clients to the party, and it gets complicated. You may need to pro-rate the amount you can deduct depending on how many employees are there, and how many customers. What you spend on employees will be fully deductible. But what you spend on customers will be subject to the 50 percent limit on meals and entertainment.
PLAYING SANTA WITH EMPLOYEES OR CUSTOMERS
The government is quite strict about what you can deduct on business gifts: $25 per person each year. Buy an employee or client something that costs more than that and anything above $25 cannot be taken as a deduction.
Two gifts a year that total more than $25, and the deduction is still $25.
Let’s say you send gifts to several employees at a client’s firm. You can deduct $25 for each of them.
If you give gifts to each of your customers’ children, they are considered indirect gifts to the customer. You get a $25 deduction, no more. If you take a bottle of wine to a customer’s party and you intend for it to be drunk at a later date, that’s also a gift.
But here’s a little gift from the government. Suppose you give your client two tickets to a sporting event or show, but you don’t go. The IRS lets you choose whether you treat it as a gift or an expense, “whichever is to your advantage.”
And, if you send all of your clients identical gifts, such as pens or desk sets, those aren’t considered gifts.
Neither is a mug or other item that has your name clearly and permanently imprinted on it. So you can send your customers a knickknack with your company name and still take a deduction for the $25 bottle of wine you give.
Source: The Associated Press.