Tax laws change all the time. And unless you’re paying close attention, the changes can slip through the cracks virtually unnoticed.
Take, for example, recent changes in business expense deductions for meals and entertainment. In tax filing seasons gone by, most business owners lumped this category into one cohesive expense. You could deduct both 50% of business meals and the entertainment costs associated with them.
Now, you can say “goodbye” to entertainment completely. While food remains 50% deductible, entertainment is 0%.
Dumping categories incoherently into your chart of accounts won’t cut it. Especially if you’re doing so with the mindset of who’s really paying attention to those insignificant details anyway?
The answer to that question is always: tax auditors. (cue terrifying Halloween music)
Meals and Entertainment Deductible Considerations
The thing with tax law changes is that there’s often a fair amount of minutiae associated with them. On top of the everyday minutiae already associated with tax filing preparation.
Relative to meals and entertainment deductibles specifically, keep in mind the following.
Itemized Documentation is Key
Let’s say you treat a client to a baseball game. Saving every receipt associated with the game is a no-brainer. Moreover, itemizing expenses in your chart of accounts relative to the game is a necessity.
Why? For starters, it enables your tax preparer to more readily do their job. But also, you can no longer book the costs — in this case, meals and entertainment — into a single category.
While the hot dog and beers enjoyed during may be eligible for a 50% deduction, the game day tickets are not. And the foam finger you bought your client as a souvenir? Well, pardon the pun, but that’s a whole other ballgame.
Types of Meals Need to be Differentiated
Building onto this idea of an itemized chart of accounts, you’ll also need to be conscious of how you define your meals by type. Not every meal is treated equally.
On-the-job meals, for example, are what you treat yourself to on the daily — the Starbucks you pick up on your way into the office. Or the sandwich you grab from the deli around the corner at lunch. These are 0% deductible.
Staff meals on the other hand, when implemented as an occasional treat to promote goodwill and comradery, are 100% deductible. This is counter to everyday employee perks like in-office lunch that are 0% deductible.
Your Business Model Matters
The type of business you run also plays a role in how deductions are applied relative to your meal expenses. Keep in mind that the numbers always have to match up with the story being told.
If you’re an eCommerce business, you’re unlikely to be wine-ing and dining clients as frequently as someone in client services. This isn’t to say you can’t take advantage of the 50% deductible — but if you’re lumping all team meals together for writing off down the road, it’s time to rethink your approach to financial management.
As a business owner, it is your responsibility to accurately book financial information so your tax preparer can apply tax laws as needed. Failure to do so only adds further time and expenses to that final bill — in addition to the potential for costly audit penalties further down the line.
At Officeheads, we’re currently working with all of our clients to reflect these meals and entertainment deductible changes in their chart of accounts. Hoping to do the same for yours’? Contact our team today to learn how.