This post is part of our industry expert series, where Yelp works with local business owners to connect you with the know-how you need to run a great small business. Greg Freyman is a Certified Public Accountant in Westwood, NJ. Check out Freyman CPA, P.C. on Yelp for more.
By: Greg Freyman, CPA
When you’re a small business owner, every dollar counts. You may be tempted to ignore tax law out of boredom, fear, or confusion, but you could be leaving money on the table by missing valuable deductions. Some areas to pay attention to are meals and entertainment and depreciation.
Meals and Entertainment
You might already know that you can take a deduction for 50% of your meals and entertainment, provided that the expense is ordinary, necessary, and business-related. What you might not realize is that in certain cases 100% of the meals or entertainment expenses may be deducted. Some of the scenarios include:
Meals and entertainment as advertising
If you provide free food or entertainment to the general public as a way to establish goodwill or to promote your company, you can deduct 100% of the cost of this.
Reimbursement of expenses by a client/customer
If you have an arrangement in which you bill meals and/or entertainment expenses through to your customer for reimbursement, you can deduct 100% of the cost. In order to meet this exclusion, you are required to substantiate the expenses (per the guidelines in IRS Publication 463) to the client or customer.
Food for employees
If you occasionally provide food and beverages to your employees (such as providing lunch during a quarterly staff meeting, or bringing in bagels to celebrate closing a large sale), you may be able to deduct 100% of the expense of those items. “De minimis” expenses are defined in the tax code, but a general rule is to consider the frequency, value, and burden of providing such a benefit. If the food and drinks are provided infrequently, are of low value, and don’t require a lot of work to provide, the expense is probably de minimis, and not subject to the 50% limitation.
When you purchase assets that are expected to last more than 12 months (such as a new computer or office furniture), you’re often required to capitalize the cost and deduct it over a number of years. You might be aware of “bonus depreciation,” which helps you by allowing you to recognize more of the expense in the year of purchase. Did you know about the alternative “safe harbor” election?
The IRS has a “safe harbor” threshold for certain asset purchases, which means you can deduct more of your expense up front and save money. This threshold excludes assets bought for inventory or for spare parts. If your company does not have audited financial statements, it can immediately deduct up to $2,500 per invoice (or item, if separately stated on the invoice) instead of depreciating the assets over multiple years. If your company does have audited financial statements, the safe harbor is even higher – $5,000 per invoice or item. In order to take advantage of this safe harbor, your business needs to be consistent in the way you handle the expensing of assets below the safe harbor. One of the best ways to do this is to establish a written tax policy for your business. You must make an election every year on your tax return if you use this safe harbor method.
Small business tax law can be pretty confusing. Often times, small businesses are missing deductions for which they’re qualified. A good accountant can help you better understand your options and utilize your money effectively, so it’s important to find one that you trust. If you don’t have an accountant or don’t regularly meet with yours, be sure to review the latest regulations on your own to make sure the rules haven’t changed.