Three Types of Business Expense Deductions You May Have Forgotten
As business owners ourselves, we want to help you take advantage of every opportunity to save money. Are you claiming all your business expense deductions? Today we talk about the 3 main types of deductions: travel, meals, and gifts!
(Before we start, note that this applies to employees who don't get reimbursed by their employers for these types of expenses!)
Oh the Places You’ll Go...For Work!
Work travel can be exciting! Let’s start with understanding what it actually means to be “away from home.” According to the IRS, you must both:
Be Away from Your Tax Home for Longer than One Day’s Work
You Sleep Away From Your Tax Home While Away
Tax Home Sweet Tax Home
A tax home is your regular place of business,and it includes the entire city and general area of business.
Such a cozy word, isn’t it? A tax home is your regular place of business, and it includes the entire city and general area of business. But - what about those who don’t have a “regular” place of business? Ask yourself these three questions to help:
How much time do you spend in each place?
How much business activity do you do in each place?
How much significant income do you earn from each place?
Temporary vs Indefinite Tax Homes
Temporary tax homes are for work that typically lasts 1 year or less. They’re away from your main place of work, and you can deduct travel expenses. On the other hand, if you’re unsure how long the engagement will last, your new location might be your indefinite tax home. It will be considered indefinite if it is expected to last more than one year, even if it actually lasts less than that. The expectation is what sets it apart. In the case of indefinite tax home, you must include your income as your living expenses. If your work gives you a travel allowance, you may be able to deduct your moving cost to your new tax home as part of a moving expense.
Types of Travel Expenses to Deduct
Transportation
Baggage/Shipping
Car
Lodging & Meals
Cleaning
Telephone
Tips
Other (Like Equipment rental, transportation to business meals)
Are you unsure if an expense counts as a travel deduction? Check out this awesome flow chart from the IRS.
Rubadubdub, Thanks for the Grub!
Don’t get too carried away - your meal expenses have two rules of the trade. The meal:
Cannot be Considered Lavish/Extravagant
Must be Based on Reasonable Circumstances
50% is the Magic Number
Your deductions have a 50% limit based on either the actual cost of the meal of the standard meal allowance.
Your deductions have a 50% limit based on either the actual cost of the meal of the standard meal allowance. In the continental United States, most meal allowances are $55 per day. Regardless of which method you use, keep records of your meals so you can claim them appropriately.
Special Exceptions
Just like for dessert, we can always make exceptions! Here are the lil debbie downers of meal deductions of when you can’t claim the deduction:
If your meals are compensation. In other words, if a meal is part of your pay, you cannot deduct it.
If your meal is reimbursed under an employer accountable plan.
If your meal is a recreational expense.
If your meal is an advertising expense.
If you’re selling meals.
If you have self-employed reimbursement expenses. There are three conditions to meet for this one:
You have them as an independent contractor.
Your customer reimburses you as part of the services you perform.
You have adequate records of the expenses that you provide to customers/clients.
Confused? Check out this guide from the IRS.
“For it is in giving that we shall receive (tax deductions)” - St. Francis of Assisi + Practical Accounting Solutions
Lastly, let’s talk about gift-giving. The bottom line - there’s a $25 limit per person during a tax year. We can also break down gifts into direct and indirect gifts. An indirect gift would be if you give a gift to a company and they get eventual benefits or their family gets benefits.
There’s a $25 limit per person during a tax year
For example, say you own a popsicle company. You give a customer a gift basket to thank them for their business. You paid $100 for this basket, and your customer shares this basket with their family. Because you have no independent business relationship with the family members (just the person you gave the gift to), you can deduct $25 for this gift.
Incidental Costs - Oops!
An incidental cost is any cost that doesn't add value to the gift. Common types of incidental costs include engraving, gift wrapping, mailing, and insuring the gift.
Exceptions to the Rules
It’s taxes - of course there are exceptions! Two main ones come to mind with gifts:
The gift is <$4 AND either:
1. Your name is Permanently on the Gift
2. You Have an Identical Item You Plan to Distribute
OR
The Gift is Promotional Collateral
In other words, these 4,000 branded squishy balls you plan to hand out can’t be counted under this exception! 😬
Conclusions
We’ll wrap this article up nicely with a (non-deductible) bow! If you’d like more information, visit HERE.
Resources
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Disclaimer: The views presented in this post are meant as educational resources and should not be taken as direct advice for your personal finances or small business. Should you have questions regarding a post relating to your specific finances, please contact us at info@practicalaccountingva.com.
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