Business owners don’t always do tax research about the various expenses they make. Many assume that all expenses related to their business are deductible on their tax returns. In many cases, this is true, but some of the rules may surprise you.
A deductible expense must be ordinary and necessary, and it must be connected to carrying on a trade or business. Of course, some items might be open to interpretation, but we have specific rules for others.
Although the Tax Cuts and Jobs Act eliminated the deduction for entertainment (sporting events, golf outings, concerts, etc.), business meals may still be 50% deductible. The taxpayer must be present and there must be a legitimate business discussion during the meal. It cannot be lavish or extravagant, but there are no specific examples in the regulations to tell us what is lavish or extravagant! Proper documentation must be kept. You need to record the cost, date, and location (which can be found on the restaurant receipt), but you also need to record the names of those present and the nature of the business discussions you had during the meal. If a meal is served during an entertainment event, like in a luxury suite at a Phillies game, you might be able to deduct the food portion if it is separately stated on the bill and you meet the other requirements.
De minimis meals can be 100% deductible. This would include things like coffee and donuts or the occasional pizza ordered for a lunchtime meeting with your staff. Employee recreation is also 100% deductible, even if a meal is served. This means the annual office holiday party or company picnic can be fully deducted as long as they are held primarily for the benefit of the employees and their families and the event does not favor officers, shareholders, or owners.
Gifts to your customers and clients might be ordinary and necessary for your business, but there are limits. Inexpensive promotional items with your business name clearly and permanently printed on them (think pens and letter openers) that cost less than $4 per item are not gifts. These would be deductible as advertising or marketing costs. If you give actual gifts like umbrellas or bottles of wine, however, you may only deduct the first $25 per recipient, per year. So if you send a $100 gift basket to a company that is your client, you could argue that the gift will be shared by the entire staff and no one person is receiving the item. But if you give a nice $90 bottle of scotch to the owner of the company, you can only deduct $25.
For a business, auto expenses can be deductible if the auto is used for business purposes. In the interest of brevity, this article only discusses business mileage, even though you can instead deduct actual auto expenses like gas and repairs. Even when deducting actual expenses, you still need a record of your business vs. personal miles. Commuting doesn’t count! The first trip of the day from your home to the first business location of the day, whether it is your office or a customer’s location, is commuting! So is the trip from your last location back to your home. Commuting miles are not business miles and should not be included in any calculation of deductible auto expenses. You must keep accurate records of all business use of a vehicle. You need contemporaneous records of the date, place, and essential character of the expense. Include the reason for the trip and any documentary evidence that can support that. For instance, if you drove 40 miles to a customer’s office, include the contract or order that he signed that day or the email he sent you asking for the meeting. There are excellent apps that can help you with documentation while automatically capturing all your miles. You don’t even have to remember to start it if you let it run in the background.
Self-employed business owners can deduct the health insurance premiums they pay for themselves and their family. Beware, however, of a little-known rule that denies the deduction if the self-employed person was eligible for an employer plan. That’s right, if you could have been on your spouse’s plan through her employer, but you decided to get your own coverage through your business, then you can’t deduct your premiums.
Fines and penalties are not deductible, even if you could argue that they are ordinary in your business. So if your delivery trucks get tickets for double parking during deliveries in the city where no parking spaces are available, you cannot deduct the fine. Similarly, a company that receives a fine from a regulatory agency for some sort of infraction may not deduct it. Contributions to political campaigns and lobbying expenses are also not deductible.
Keep in mind that there are tax regulations and rules for many other types of expenses. You should use detailed descriptions in your business records so that your CPA can properly report the items and so that you have adequate documentation in the event of a tax audit.
Originally published for the Burlington County Regional Chamber of Commerce.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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