The Fun Side of Taxes

Features - Finance & Accounting

Last December’s tax cuts rewrote the rules for business write-offs and deductions but didn't take all of the fun out of business entertainment.

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September 17, 2018

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Taxes can be fun? Well, not exactly, but our federal tax rules do permit write-offs and deductions for a number of enjoyable activities, events and other expenditures made by a snow removal or ice management business in the pursuit of income, happy employees and content owners. Although much has been said and written about tax deductible picnics and holiday parties, the tax rules allow deductions for many, many other enjoyable activities.

Entertainment may, in many cases, be considered a business necessity but it can also be enjoyable. When a snow removal contractor entertains customers or potential customers, the costs can really add up, but they are usually tax deductible — even after the tax laws were “reformed.”

NEW RULES

The deduction for food and beverage costs incurred in the course of travel away from home were impacted by last December’s Tax Cuts and Jobs Act (TCJA) which limited the deduction for meal and entertainment expenses to 50 percent of the amount spent.

Fortunately, deductions for meal and entertainment expenses remain a viable option for every business.

Generally, all “ordinary and necessary” expenses of entertaining a customer or client, so long as they are not ‘lavish or extravagant under the circumstances” and if:

  • The expenses qualify as meals or entertainment
  • The expenses bear the necessary relationship to the snow removal business and adequate records are maintained to substantiate the expense
  • Are deductible
  • Qualifying as meal and entertainment expenses are activities considered to provide entertainment, amusement or recreation at places such as:
  • Nightclubs
  • Social, athletic and sporting clubs
  • Theaters
  • Sporting events
  • Hunting, fishing and similar trips

The cost of tickets to events can be deductible. However, only the face value of the ticket can be deducted even if a higher price was paid. An exception is made when that higher ticket price is part of a package deal or for a ticket to a sporting event that benefits a charitable organization. Even better, the 50-percent limit on entertainment expenses doesn’t apply to any expense that is a means of advertising or promoting goodwill in the community.

GIFTING

Every business owner and manager should keep in mind the role that taxes play in gifting. Those snow removal contractors considering a "small gift" for employees — fruit baskets, hams, turkeys, wine, flowers and occasional entertainment tickets, such as for a show or sporting event, will find they are generally nontaxable de minimis fringes and tax deductible by the business.

Many snow removal and ice management businesses frequently give gifts to clients and customers, particularly around the holidays. What is often overlooked is that only a portion of the cost of certain gifts may be deducted as a business expense.

Basically, the IRS allows a business to deduct only $25 or less for business gifts given to any one person during the tax year. Any amount of expense in excess of $25 is disallowed as a deduction. So, if a customer or client is given a $50 watch as a gift, only $25 may be deducted.

Gifts made to corporations or to business entities which are intended for the personal use or benefit of an individual (such as the president or manager) or a small class of individuals are considered to have been made to the individual or individuals who actually benefit from the gifts.

Some items are, of course, are excepted from the gift limitations. Gifts of key chains or pens with the business’s name and/or logo on them to customers and clients are not considered gifts. In a nutshell, the following items are excepted from the $25 limit that normally applies to business gifts and their cost is deductible without limitation:

  • Items costing $4 or less, have the business’s name clearly and permanently imprinted on them, and are one of a number of identical items widely distributed
  • Signs, display racks or other promotional material to be used on the business premises of the recipient.

PARTY CENTRAL

Although the TCJA cracked down on deductions for entertainment, a snow removal contractor can still write-off the full cost of a holiday party, company picnic or barbecue -– at least if certain requirements are met. This can be a good way to help build company morale on Uncle Sam’s dime.

Under earlier tax rules, 50 percent of the cost of entertainment that was directly-related-to or associated with the snow removal business could be deducted. Obviously, “associated with” included expenses that immediately preceded or followed a substantial business meeting.

For employees, the value of many fringe benefits was exempt from tax. Unfortunately, the TCJA eliminated most of those earlier deductions related to business entertainment. What’s more, the 100 percent deduction for business-provided eating facilities was cut in half to 50 percent from 2018 until 2026 when it will be completely eliminated.

A notable exception preserved in the TCJA allows a snow removal contractor to deduct 100 percent of the cost of a company get-together -– while remaining tax-free to employees. The important thing to remember is that all employees must be invited. The business cannot limit attendance to corporate officers or high-ups. It has to be everyone.

Should a few friends crash the party this, in and of itself won’t jeopardize the deduction although all expenses attributable to social guests are non-deductible. If, for instance, 20 employees and their significant others, plus five couples who are friends, are invited to a picnic, party or other event costing $10,000. Under the rules, based on 40 business guests out of 50 people, 80 percent, or $8,000, of the expense can be written-off.

Under our tax rules, entertainment expenses must be "primarily" for the benefit of employees other than a so-called "tainted group." The tainted group consists of any employee paid more than $110,000 a year, a 10 percent owner or any family member of a 10 percent owner.

PROOF REQUIRED

Deductions for meals and entertainment, travel away from home, business gifts and, yes, parties, requires a higher level of substantiation than many other business expenses. Generally, for these expenses, a snow removal contractor must show the amount, time and place, as well as the business purpose, even the business relationship to any person entertained (if the expense is for meals and entertainment).

The cost of occasional parties is nontaxable to employees and their families as a de minimis fringe – if they are infrequent and for the purpose of promoting employee health, goodwill, contentment or efficiency. Thus, occasional holiday celebrations, cocktail parties and company picnics are fully tax deductible by the snow and ice removal business and they are not subject to the 50 percent limit on business meals. It is, however, always a good idea to consult a tax advisor.

Mark E. Battersby is a Ardmore, Pa.-based financial writer and regular snow magazine contributor.