When the Rules Change – Is it Still Tax Deductible?
For the most part, the list of federal income tax deductible items has been stable over the years. However, getting too comfortable with deductibility, especially with specialty deductions for certain business types, can get you into trouble. Your tax preparer should be keeping up with tax deductible items and the rules for deductibility, but how you categorize an expense item can result in tax preparation errors. The old “garbage-in means garbage-out” saying holds true.
Some small business owners consider themselves efficient and on top of their business and what items are tax deductible. Some just submit income and expense spreadsheets to their tax preparer or fill in the blanks with an online tax service. Most of the time you can be OK doing this, but errors in categorization and reporting of expenses can result in the IRS computers flagging your return for examination.
Turbulent times, whether weather, politics, or economy related, do not necessarily influence tax policy, though they can. More likely is a small business owner not catching seemingly minor changes in the rules that can cause problems. It is often not the actual error that ends up costing that much. It is the IRS scrutiny that it can bring to your tax return and your business.
As an example, in recent years the deductibility of business meals and business entertainment have been modified. In 2021, there were changes to both business meal tax deductible items and business related entertainment as welli.
- There is a 100% deduction for business meal expenses at qualifying restaurants. It is a temporary action good for expenses incurred between December 31, 2020, and January 1, 2023.
- There are always exceptions though. Some expenses will only be tax deductible up to 50% of the cost. These include:
- Food or beverages that are purchased not for immediate consumption are only 50% tax deductible. These would include costs for items purchased at grocery stores, food courts, convenience stores, drugstores, etc.
- Meals provided on the business premises and excluded from the employees’ gross income.
As always, the rules can get a bit complicated, so consult your tax advisor or CPA.
- Recreational or social activities provided for employees would involve 100% tax deductible expenses. This would include things like a company picnic or business sponsored trip or activity.
- The costs for sporting events, concerts, etc. are not tax deductible.
- Goods, services, or facilities made available to the public to promote the business are 100% deductible. A grand opening celebration is one example.
It is important to break out meal and entertainment expenses separately when they are provided in the same venue, as it may determine the expense tax deductible status. An example might be entertaining clients at a sporting event (non-deductible), but on the same outing taking them to a qualified restaurant for a meal.
The value of a tax professional or CPA is clear when interpreting whether expenses related to meals and entertainment are tax deductible.