I am proud to call myself a female entrepreneur, as are many of my clients. There is nothing I love more than my job and helping people live a better life. But being a business owner also means there is a business to run, and business expenses to control.
Always on the look-out for helpful business information for myself and my business owner clients, we came across a white paper by Digit Keeper recently on how to maximize Travel and Entertainment deductions that we thought was terrific. Digit Keeper, we learned, is a company that provides digital bookkeeping for small business owners.
We realize getting excited about tax deductions might sound a little crazy, but if you are a business owner, we know you can relate. We work hard and we’d like that to translate into financial gain. Keeping more of your money, rather than paying it in taxes is something nearly every one of our clients wants help with.
That being said, no one wants an IRS audit and Travel and Entertainment is one of the most audited areas by the IRS. The IRS doesn’t like grey. It likes black and white. So Digit Keeper put together a guide on what you need to know to maximize your travel and entertainment expenses. We share the highlights below.
By following the rules you can stay out of trouble. By knowing the rules you can maximize your deductions.
What are the rules for travel and entertainment deductions? When is an expense deductible?
1. An expense must be Ordinary and Necessary
This means the expense must be necessary to help your business grow and function. Like internet expenses or a conference. Buying a yacht for entertaining clients is probably not a deductible expense, but entertaining clients on it may be.
2. It must have a business purpose
Having lunch with your assistant might be considered an ordinary expense, but if it doesn’t impact your business, it cannot be deducted. However, have an agenda and defined goals that are covered at the lunch, and the lunch now may have a business purpose.
3. You must have documentation
This is a big one. Documentation means having receipts and a journal, which would need to be produced in the event of an audit. Your receipts must show the date, amount, business purpose, attendees, and business relationship. Your journal must show time and date of meeting, the activity, business purpose, who attended and the business relationship. The journal may be your calendar, a notebook, or a spreadsheet, whatever works best for you.
How much can you deduct? And on what?
LOCAL MEALS AND ENTERTAINMENT
These are 50% deductible, but you need to follow the rules. And this area is one that is often abused, and most audited by the IRS. Big thing to remember here is documentation, and that your expenses that are not over the top. Best way to avoid an issue here is to submit everything to your CPA so they can make the proper call.
TRAVEL EXPENSES
Did you know that business travel expenses are 100% deductible? This means transportation, meals, accommodations, and incidentals are all deductible IF they meet the requirements to qualify as a business expense. But you must stay overnight and, of course, meet the definition of business expense and documentation requirements.
Fun facts here: you can take a spouse, child or friend on a business trip and deduct a portion of their expenses. These would be in particular shared expenses like hotel or rental car (expenses you would incur whether you were with someone else or not). Another fun fact we learned was that working a full Friday and Monday on a business trip means that expenses over the weekend can be deducted, as long as Friday and Monday are full working days.
AUTO EXPENSES
Auto Expenses vary with the amount that is deductible, ranging from 0-100% deductible. There are two different ways to deduct car expenses if you are using your car for business: Mileage, or Use and Maintenance. There is a set .575 per mile deduction (Currently: This amount changes frequently). This only applies to business miles, so its critical you track mileage for your business meeting/events, especially if you also use the car for personal use. If you choose the Use and Maintenance option, you need to keep a mileage log, track expenses like gas, insurance, maintenance, oil changes, and repairs and have documentation for everything.
We definitely learned about opportunities to maximize our travel and entertainment deductions from the Digit Keeper white paper, and encourage you to check it out if you’d like more detail. We spoke with Melissa Pendleton recently, VP of Sales for Digit Keeper. She shared with us that in addition to helping entrepreneurs with the necessary evil of bookkeeping, Digit Keeper’s management team is mostly women and strong supporters of women in business. We are huge fans of their Women to Watch series, which profiles notable women entrepreneurs on their website.
The old adage “it’s not what you make, it’s what you keep,” is something we truly believe at WealthChoice. It’s why we partner with our client’s CPA’s so that nothing is missed when it comes to business deductions, and so our clients can keep more of what they work so very hard to earn. If you’d like to learn more about how we help our clients, contact us.
