How do we ultimately win the game and legally pay the least amount of taxes to the IRS? According to BollitProof’s founder, Randall Boll, it’s all about your deductions.
“We all know that if the IRS has an opportunity to find a crack, they will open it up into a canyon,” says Randall Boll, “and the deduction where most people fall into that canyon is entertainment.” Bad News: the entertainment deduction is dead. Good News: you can still deduct 100% of your business and meal costs, as long as you utilize Notice 2021-63* of the Tax Code and the 3’R’s of business ownership. Let’s look at how this all works. The federal income tax treatment of business-related meal and entertainment expenses has been a moving target, leaving many tax-payers confused. From 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) has permanently eliminated deductions for most business-related entertainment expenses.
Before the TCJA, you could deduct 50% of the cost of most business entertainment. But after the TCJA change, you can no longer deduct any part of the cost of taking clients out for a round of golf, to the baseball field, or for a ride on the Ferris wheel – that’s gone. You need to forget the old rule that you can claim expenses as long as they are directly related to earning your assessable income. Even if you are seeing clients to discuss business matters, the tax office will now disallow anything it classifies as entertainment expenses. According to Randall Boll, “the key is to establish what ‘entertainment’ really means and avoid those expenses as they are no longer deductible.”
There are four aspects to consider when deciding whether the cost of your client’s meal is an entertainment expense or a deductible expense.
1 Is it being provided for enjoyment or is it for refreshment?
Anything provided for enjoyment or in a social setting is regarded as entertainment. However, this treatment doesn’t apply to refreshments that allow you, your employees and the client to complete the working day in comfort.
2 How elaborate is the meal?
Simple meals involving sandwiches, finger foods and salads are not deemed to be entertainment. The same goes for morning and afternoon tea favourites like tea, coffee, fruit drinks, cakes and biscuits.
3 Is it consumed during or outside work time?
Refreshments provided during work time will not likely be characterised as entertainment.
4 Is it consumed on your business premises?
Food or drink consumed on your business premises is less likely to be considered as entertainment when compared with dining in a function room, hotel, restaurant, cafe or coffee shop. You may qualify for a deduction if your client is served light refreshments on your business premises during work time. There is a silver lining here. There’s an opportunity to deduct 100% of your entertainment expenses if it impacts your employees. There was recently a case in the tax world where a company hired powerboats 41 times a year for employees. The cost was $1,000 each time and the firm had about 100 employees and everybody participated, not just the high level executives. That’s $41,000 a year! This ended up in tax court and the court upheld the entire $41,000 deduction as it was proven to be a legitimate entertainment expense impacting the employees. The idea was that the cruises were used only for employees and without discrimination and the IRS deemed them ordinary and necessary expenses, which are covered under Section 162 of the tax code. This is probably the most important section for any business owner – Section 162. It creates time for you to share some quality time with your employees. From a practical business perspective, it can make a huge difference if you capitalize on the three Rs of business – recruit, reward and retain. You can host a great entertainment event to recruit high quality employees to join your company and if you want to retain these valuable staff members, you can entertain as a reward – whether it’s going on a boat, or to the country club with your staff. This break allows you to build deeper relationships with your staff and build a stronger business. So, as long as it is primarily impacting your employees, you can use this deduction and enjoy it!
* Notice 2021-63 provides guidance regarding the temporary 100-percent deduction for expenses that are paid or incurred after December 31, 2020, and before January 1, 2023, for food or beverages provided by a restaurant for purposes of § 274(n)(2)(D) of the Internal Revenue Code. In particular, the notice sets forth a special rule that allows a taxpayer to treat the meal portion of a per diem rate or allowance as being attributable to food or beverages provided by a restaurant.