- Created on Saturday, 03 May 2003 03:27
- Written by MARK E. BATTERSBY
Entertainment can mean entertaining guests at nightclubs, sporting events, theaters, etc., although the type of business must be considered when trying to determine what constitutes legitimate business expenses. A plumber, for example, might find him or herself hard-pressed to justify jetting around the country unless it were to attend a trade show or convention. However, when one supplies distributor conducted a fashion show for the spouses of retailers, that show was considered legitimate entertainment.
Although almost every laundry professional can reap a tax deduction while enjoying both business entertainment and business-related travel, travel and entertainment expenses, unlike many other business deductions, are subject to special limits. For example, with a number of notable exceptions, only 50 percent of meal and entertainment expenses are tax deductible. That 50 percent rule doesn't apply to expenses for goods, services and facilities made available to the general public, such as when a restaurant offers free meals on occasion to good customers.
EATING AS ENTERTAINMENT
Under our federal tax rules entertainment-related meal expenses are not tax deductible unless it is directly related to the active conduct of a trade or business. If a meal expense directly precedes or follows what the IRS considers a "substantial and bona fide" business discussion (including a business discussion at a convention), then it is tax deductible -- so long as it was "associated" with the active conduct of the laundry business.
There are two additional restrictions placed on the deduction for meal expenses: (1) meal expenses are rarely tax deductible if neither the individual nor the individual's employer is present at the meal, and (2) no deduction will be allowed for food and beverages to the extent that the expense is lavish or extravagant under the circumstances.
What's more, the following entertainment expenses are deductible so long as they meet the "ordinary and necessary" requirements for all business expenses and if they are properly substantiated. They may, of course, be subject to the 50 percent rule:
- Food and beverages for employees furnished on the laundry operation's business premises.
- Expenses for services, goods and facilities that are treated as compensation or wages for withholding tax purposes.
- Recreational expenses primarily for employees who, for this purpose, are not highly compensated. A good example of this expense would be a company picnic.
- Expenses of employees', stockholders', agents' or directors' business meetings.
- Expenses directly related and necessary to attendance at a business meeting of a tax-exempt business league, including a real estate board, chamber of commerce or board of trade.
- Goods, services and facilities that are furnished to nonemployees as entertainment, amusement or recreation expenses and that are includable in the recipients' incomes.
50 PERCENT IS BETTER THAN NOTHING, SOMETIMES
As already mentioned, the amount allowed, as a tax deduction for meal and entertainment expenses is generally limited to 50 percent of the amount actually spent. Food and beverage costs incurred in the course of travel away from home also fall within the scope of this rule.
What's more, the 50 percent rule is applied only after determining the amount of the otherwise allowable deductions. In other words, the portion of a travel meal that is lavish and extravagant must first be subtracted from the meal cost before the 50 percent reduction is applied. Related expenses, such as taxes and tips for entertainment expenses, must be included in the total expense before applying the 50 percent reduction. Any allowable deductions for transportation costs to and from a business meal are not, of course, reduced.
Similarly, the cost of a ticket package to a sporting event and related expenses is also exempt from the 50 percent reduction -- if the event is organized to benefit a tax-exempt organization and volunteers provide substantially all of the work in carrying out the event. In other situations, a deduction for a ticket may not exceed the ticket's face value.
Every laundry professional should also keep in mind that when a skybox is rented for more than one event, the deduction cannot exceed the price on non-luxury box seats (subject to the usual 50 percent limit). While expenses for recreational facilities primarily for the benefit of employees are usually deductible, no deduction is generally allowed for any expense for entertainment facilities such as yachts, swimming pools, tennis courts or bowling alleys
SUBSTANTIATING THE FUN AND BUSINESS
In order to claim any tax deductions, a laundry professional must be able to prove that the expenses were in fact paid or incurred. A number of expenses, which our lawmakers deem as particularly susceptible to abuse, must also be substantiated by adequate records or by the launderer's own statement, corroborated by sufficient evidence: expenses relating to travel away from home (including meals and lodging), entertainment expenses, business gifts and all expenses in connection with use of so-called "listed" property" such as cars and computers.
T&E expenses must be substantiated as to (1) amount, (2) time and place and (3) business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated.
An employee's expenses are considered to have been substantiated if the employee provides an adequate accounting of those expenses to the employer. In this situation, the adequate accounting requirement can be satisfied by using a "per diem" allowance for lodging and/or meal and incidental expenses. Many sales people long ago discovered that a contemporaneous log is not required although a record of the elements of the expense or use of the listed property should be made at or near the time of the expenditure or use -- supported by sufficient documentary evidence. This has a high degree of creditability.
Adequate accounting generally requires the submission of an account book, expense diary or log, or similar record maintained by the employee and recorded at or near the time of occurrence of the expense. Documentary evidence such as receipts or paid bills, is not usually required for expenses that are less than $75. Documentary evidence for lodging expense is mandatory.
The so-called "Cohan rule," which has been used by the courts to estimate the amount of a taxpayer's expenses when adequate records do not exist, may not be used to estimate T&E expenses. Naturally, if any laundry professional can establish that the records were lost due to circumstances beyond his or her control, such as destruction by fire or flood, then he/she does have a right to substantiate deductions using a reasonable construction of the expenditure or use.
GETTING AWAY FROM HOME
There are valid reasons why any laundry professional would travel in connection with business. Distant suppliers, conventions, trade shows, meetings, education, all come to mind. In general, a tax deduction is allowed for ordinary and necessary traveling expense incurred by anyone while away for home in the conduct of their laundry operation or business.
Being "away from home" means that the laundry professional's duties require them to be away from the general area of their tax homes longer than an ordinary workday or that it might be reasonable for them to need sleep or rest. In fact, in some cases, travel expenses may be deductible even though a laundry professional is away from home for periods of less than 24 hours.
When there are multiple areas of business activity or places of regular employment, the principal place of business is treated as the tax home. Business travel expenses incurred while away from the principal place of business are deductible.
What is deductible? The following expenses paid or incurred while traveling away from home are ordinarily considered tax deductible: travel, meals and lodging; transportation, plus a reasonable amount for baggage, necessary supplies and display materials; hotel rooms, sample rooms, telephone and fax services and public stenographers; as well as the costs (including depreciation) of maintaining and operating a car for business purposes.
Travel expenses are not allowed for a spouse, dependent or other individual who accompanies the launderer on a business trip unless that person is an employee of the person or business who is paying or reimbursing the expenses. The travel of that spouse or family member or other person must also serve a bona fide business purpose.
The goal of every business is to make money and, in many laundries and laundry-related businesses, entertainment and travel contribute to a more profitable bottom-line. In addition to being an enjoyable fringe benefit, business-related travel and entertainment can also be quite economical, defrayed with some smart tax planning.
"Mark E. Battersby is a tax and financial adviser, lecturer, columnist, freelance writer and author with offices in the suburban Philadelphia community of Ardmore, Pennsylvania. For more than 25 years, Mr. Battersby, a former enrolled practitioner, has written for trade and consumer magazines in many fields. The author of four books, Mr. Battersby syndicates four weekly topical columns to more than 65 publications and writes columns for 17 trade magazines each month."
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