One of the most exciting parts of owning your own business is writing off expenses for you taxes. It can also be one of the most potentially damaging exercises to execute as the lines are often gray and it’s easy to get deduction happy. There’s also the fear of getting in trouble with the government.
One of the most common expense categories is Meals and Entertainment (M&E). There is often times a lot of leniency in this area, but there can also be a lot of confusion in regard to when deductions can and can’t be made, to what degree, how much is deducted, etc.
For the best results, you should hire a certified professional to help with your accounting and your taxes. Professionals can sometimes even save you enough money to offset their own cost, but if nothing else, they will allow you to rest assured that the IRS won’t be coming for you.
Aside from hiring someone though, there are certain tips for getting the most out of deductions while staying legally legit. Here is a guide for getting the most out of your M&E:
Don’t forget the business
This sounds crazy but it’s easy to get caught up in party throwing, event planning, and guest listing that many people forget that they have to include business interactions in there somewhere. And for the IRS, an affair just to build morale doesn’t cut it. So, take a break in the middle of your party to show off a new piece of equipment or introduce the staff – something that is considered business.
The same applies for writing off meals, too. Just because you sit down and polish off a bottle of scotch with a business partner doesn’t mean it’s automatically deductible. You have to discuss business in order for it to legitimately qualify for a write-off. And, you can’t write off a meal you’re having with your baby nephew on your way through Burger King. Discussions must be with people who are, or can be, involved in your business (business partners, clients, contractors, etc.)
Keep detailed records
For small businesses especially, it seems pretty unlikely that the government is actually going to stop in to check on little ol’ you. Many tax professionals will even admit that to you as well. But as unlikely as it is, you don’t want to get caught ill prepared if you manage to catch their attention. Keep your receipts and make sure to record all related details as proof of purchase and relevance to your business.
There are a number of ways you can keep track of your expenses these days. Of course, there’s the tried and true method of stashing away the hard copy receipts and sorting them into files, which can later be accessed if necessary. I prefer to use Evernote for my documentation though; it includes a feature that allows you to take pictures of documents – like receipts – and add them to folders and files in a cloud-based platform. Evernote makes the images searchable by text so if you have a receipt from Harry’s Hair & Makeup then you can later search for “Harry’s” and it should pop up.
Know when to stop
This sounds counterintuitive, but it can sometimes actually be a waste of time to go through the hassle of writing something off. Or, maybe you would make your decision differently if you realized the way it can or can’t be deducted.
For instance, if you’re throwing a party for your business then the related expenses can be broken down in two different ways: If the party is for the general public or for your employees then you’d be able to deduct 100% of the costs. However, if the same event is for potential clients and contractors you work with then you’ll only be allowed to deduct 50% of the costs.
Also, in some cases, it might take more money for your accountant and tax professional to process the paperwork than you’ll be able to deduct. If it takes Janet an hour at $50 to process $60 worth of receipts that you only get half credit for then you’ll actually lose money by doing it.
Practice makes perfect
If you’re new to the whole process, you’ll learn the ins-and-outs after a while and you’ll become familiar with what and what not to write off and how everything is handled. Working with financial professionals is the safest route but whatever you do, just make sure that you are careful and thorough.