Travel and transportation expenses related to business can be deductible, which means it can lower your business’ taxable income and ultimately lower your tax bill to the IRS. However, consider these rules and your circumstances before claiming your travel and transportation expenses as deductible. To start off, the expenses must be considered ordinary and necessary to the industry and to the conduct of your business.
Deductible travel expenses require the worker to be away from the general area of a worker’s tax home, substantially longer than a regular day’s work and require substantial sleep or rest to do the work while away from a tax home.
Tax Home
Determining where your tax home is located is important whether your travel expenses may be deductible or not. Simply put, your tax home is your regular place of business. This also includes the general area you conduct your business in. It may not necessarily be your family home. For example:
Kevin works for a construction firm based out of Pasadena, CA. He commutes from his home 50 miles away in Fontana, CA. The firm carries out various transportation projects throughout the state. Kevin is assigned to help manage a project located in Ridgecrest, CA and is stationed there for a few weeks.
Despite his long commute from Fontana, Kevin’s tax home is considered to be in Pasadena, CA because he primarily works out of there. His costs related to commuting are not considered deductible business travel expenses because those are personal expenses he takes to get to his primary place of work in Pasadena.
Deductible Travel Expenses
Travel from the tax home to locations where business needs to be conducted and related expenses can be claimed as business expense deductions. This includes all common transportation (airplane, bus, taxi, etc.), meals (subject to the 50% limit), business calls, baggage and shipping, and even small incidental costs.
Going back to the previous example, the related travel expenses Kevin incurs for his trip to Ridgecrest from Pasadena can be deductible, including his car expenses should he take his own car there. Any meals he has on his way can also be claimed as business-related deductions, but are subject to the 50% limit, so for example he can only claim up to $5 on the $10 meal he orders. The hotel expenses he incurs while staying in Ridgecrest can also be claimed as deductible travel expenses.
Standard Mileage Rate & Standard Meal Allowance
As an alternative option to keeping track of actual car and meal expenses related to travel, you can opt for federally-set standard mileage and standard meal allowances. The rate for the standard mileage rate is 53.5 cents per mile for 2017. The standard meal allowance per day is $51 for 2017.
As always, maintain extensive and detailed documentation to help substantiate the deductions you claim in case the IRS may question them. Records of meetings, who attended, the purpose, and other detailed notes will always help.
Due to the open-to-interpretation rules surrounding claiming deductions on travel expenses, additional considerations must be made for more complicated expenses, such as depreciation of vehicles used and travel taken outside of the United States. What we have gone over is a general overview. However, we do hope you found this article informative, or at least tipped your interest in learning more about deductible business travel expenses.
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Entertainment, meal, and gift expenses are some of the available deductions a small business can take advantage of when filing their taxes. If you itemize enough deductions, you can potentially lower your taxable income and ultimately lower your tax bill you owe to the IRS. Naturally though, there are a slew of rules and requirements for entertainment, meal and gift expenses to properly qualify as a deduction. As a starting point, these expenses must be considered ordinary and necessary in your industry and to your business to qualify. Ordinary implies the expense is commonly accepted in your trade or industry. Necessary implies expenses that are helpful and appropriate for your trade or industry.
Gift expenses
The deduction limit for a gift is a flat $25 per person for a tax year. So for example, if you give a prospective client a ticket worth $130 for a lower-level seat at the Staples Center for a Los Angeles Lakers game, you can only deduct up to $25 for that item. One flexible option for gift expenses, in the case of sporting and entertainment tickets, is that if you do not attend the event with the recipient, you are given the option of either claiming the expense as a gift expense or entertainment expense. Choose whichever may be more advantageous for you. Treating it as an entertainment expense has some additional rules though.
Entertainment Expenses – Qualifying Tests
Assuming your entertainment expenses pass the ordinary and necessary business expense requirement for deductions, the next question to be asked is if those expenses meet the directly related or associated tests.
To be considered “directly related”, these criteria must be met:
The main purpose is business.
Business was conducted during the entertainment.
You had more than a general expectation of income or some future business benefit.
An example of this could be the Presidents of two different companies getting together and playing golf while discussing details of a merger and how to carry it out.
The “associated test” is less stringent on expenses:
Associated with the active conduct of the business.
Substantial business discussion took place before or after the associated entertainment.
An example of this is a company holding a meeting discussing future business plans at their office then hosting a dinner event for its employees at a nearby steakhouse.
50% Limit
Generally, for all qualifying entertainment and meal expenses, you are only allowed to deduct up to 50% of the cost. There are some exceptions, such as self-employed people’s meals not subject to the deduction (so long as it is business-related) or costs related to attending a charitable sports event.
In all circumstances, maintaining detailed records is important for gift, entertainment, and meal expenses that you plan to claim as a deduction. Records of minutes of a meeting, who attended, receipts, invoices, and other notes can help you substantiate your answers in case the IRS may come knocking with questions. As a final comment, anything that appears lavishly expensive (e.g. luxury box seats at a sporting event) may disqualify an expense as deductible. So, use your best judgement and ask us as your accountant if your business expense truly meets the ‘ordinary and necessary’ requirements.
Hopefully you found this article on meal and entertainment expenses informative. We post business tax articles and other “good to know” pieces regularly. Follow us on our social media pages for future updates!
MiklosCPA’s main goal for our clients is to be not only an informative resource but a supportive asset in managing their accounting and tax needs. If you are interested in learning more about our services, please do not hesitate to contact us!
One of the great advantages of a owning a business is being able to deduct numerous expenses for your income taxes. Advertising expenses, meals, interest expenses, and other expenses related to your business can be claimed as deductions. However, you can’t just claim any expense that may only be slightly related to your business.
Ordinary and Necessary
There are two generally well-defined qualifications for a deductible business expense to be allowable, ordinary and necessary. Essentially, an ordinary expense is one that is common and accepted in your industry. Necessary expenses are considered ones that are helpful and appropriate for your trade or business.
For example buying automotive parts for an auto repair shop would be considered ordinary expenses, but if a donut shop bought them, the expenses are not considered ordinary and would not be allowable as a deduction. However, if the donut shop regularly delivers its goods around town with a company-owned truck, the parts may be considered a necessary expense and ordinary for what they normally do as a business for deliveries, so it may end up as an allowable deduction.
Some things that can be claimed as deductible business expenses:
Travel related expenses, including fare and lodging costs
Meals & Entertainment (only up to 50% of the cost)
Transportation expenses, including gas and some repairs
Costs directly related to starting up a business
Depreciation costs of business assets
Interest expenses
Bad business debts
Operating losses
Personal and business expenses
Sometimes, personal and business events may overlap, such as traveling for business and spending some time while traveling on personal matters. In order to claim deductions on the business related expenses, you will need to separate the personal expenses from the business ones. Keeping good records and details, such as notes regarding business meetings and the purpose for it, will always help justify your deduction claims in case the IRS may question them.
There are additional rules and considerations that go into claiming deductions appropriately for more complex expenses such as depreciation expenses or bad business debts. Those issues take a little more individualized attention, which our firm can certainly assist you with. MiklosCPA is a California accounting firm focused on helping businesses with their back-room accounting and taxation needs. We utilize the latest in cloud-based technologies with personalized services to reflect your business’s plans. If you are interested in learning more about our services, give us a call! We also post tax and other accounting “good to know” articles regularly. Follow us on our social media pages for future updates!
There are a plenty of business tax credits that can be utilized by small business owners in helping with their taxes. Unlike deductions that only reduce your taxable income, tax credits can directly reduce the amount that you may end up owing to the IRS..
These general business tax credits need IRS Form 3800 for “General Business Tax Credits” and need to be properly filed to claim them. Just to list a few of the interesting ones that are out there:
Alternative Motor Vehicle Credit – owning and utilizing a qualified vehicle powered by an alternative fuel source, such as a hydrogen car can qualify for a tax credit.
Biodiesel and Renewable Diesel Fuel Credit – producing biodiesel and other renewable fuels can also be claimed for a tax credit.
Credit for Employer-Provided Childcare Facilities – businesses with qualified expenses related to providing childcare for employees can claim this credit.
Credit for Increasing Research Activities – a tax credit encouraging businesses to spend more money in research-related activities, such as developing alternative fuel sources.
Credit for Small Employer Pension Plan Startup Costs – available to small businesses for qualified costs related to establishing simplified employee pension (SEP) and Savings Incentive Matching Plans for Employees (SIMPLE). Want to find out more?
Distilled Spirits Credit – distillers, importers of distilled spirits, and eligible wholesalers of distilled spirits can claim a credit aimed to support this industry.
Empowerment Zone Employment Credit – available to employers who have employees and are engaged in a business in federally specified “empowerment zones”. For Southern California, certain zip codes of Los Angeles and Santa Ana are designated as empowerment zones.
Indian Employment Credit – businesses with qualified wage and insurance expenses for qualified Native American Indians who live on or near a reservation can claim this credit.
Work Opportunity Tax Credit – incentivizes employers to hire people from certain qualified and designated groups that tend to have higher unemployment rates, such as disabled veterans, ex-felons, and people receiving food stamps assistance.
These and other business credits have their own rules and requirements to properly claim them. There are also specific forms that must be attached to claim these credits on your Form 3800, such as Form 8845 for the Indian Employment Credit.
Interested in learning how your business can take advantage of these and other business credits? MiklosCPA is a greater Los Angeles and Orange County-area CPA firm that has knowledge and experience in helping small businesses properly prepare their taxes and utilize available tax advantages.
So you’ve got your small business set up and have a small team of employees to support your operations and goals. However, now the question that lingers is, how do I keep them on this team? Larger companies have many perks and incentives such as retirement plans that encourage people to consider jumping ship.
Setting up a retirement plan for you small business encourages employees to stay with you for the long haul, as well as build your own nest egg for your own retirement. Additionally, business deductions and other credits can be claimed for setting up and maintaining savings plans for your employees.
Here are a couple of common types of savings and retirement plans small businesses use:
Simplified Employee Pension (SEP) – A savings plan that is very easy to set up. Usually used by sole proprietors and very small businesses. The SEP comes in the form of an IRA account. Participants must contribute to the SEP-IRA in the form of money (e.g., check, money order, cash). The annual contribution limit is up to 25% of the employee’s compensation or $53,000. A tax credit can be claimed for starting an SEP and deductions can be claimed for contributions to it.
Savings Incentive Matching Plans for Employees (SIMPLE) IRA and 401k Plans – Savings plan that is available to small companies of 100 or fewer employees who received $5,000 or more in compensation in a year. Employees elect a certain salary deduction to contribute and the employer matches the amount up to 3% percent. Annual contribution limit for an employee in 2017 is $18,000 (401k Plans). Contributions to SIMPLE plans can also be claimed as deductions on an individual’s income tax filing.
Qualified Plans – Savings plans available to small businesses and corporations. Generally divided into two types of plans, defined benefit and defined contribution plans. In very simplified terms, defined benefit plans are retirement plans that lay out what retirement benefits and amounts will be paid out (e.g. State employee pension programs) while defined
contribution plans define how much money will need to be contributed to a plan (e.g. private employer 401k profit-sharing plans). The rules surrounding setting up and maintaining qualified plans are much more complex and often small businesses will adopt pre-made plans from large brokerage firms like Charles Schwab.
This is general overview of common plans available to small businesses for savings and retirement. There are many more bylaws and rules surrounding setting up and maintaining these kinds of plans, as well as the number of employees you have and the contribution limits.
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Ever thought about being your own boss? Want your work to attest to your own skill, rather than have middle managers to deal with? Or maybe bring people together and work for a common dream? Consider starting your own business. Establishing a business in the United States is not relatively complicated. To start off, figure out what kind of business you want to participate in. Next, you need to decide on what kind of type of business structure you want (sole proprietor, partnership, corporation, etc.), and then develop a reliable and robust recordkeeping system.
Which business structure should I go with?
These are some of the most common business types that are established:
Sole proprietorship – Very simple type of business. Unincorporated and owned by a single individual. All profit, liabilities, and taxes are connected to the individual owner, and therefore are simply reported on an person’s 1040 form.
Partnership – Owned and operated by 2 or more people who are in a business relationship. Partners contribute capital and are involved in the operations of the company. Partnerships are known as “pass through entities”, which means the
partnership’s taxes are passed along to the partners of the firm and onto their individual tax forms. However, they still must file informal returns of the company’s operations.
Corporation – Shareholders exchange capital and other assets in exchange for stock ownership of a corporation. More complicated type of business with many rules and regulations surrounding it. Corporations are regarded as separate legal entities and are taxed like individuals. This means a corporation’s shareholders are double taxed (individually, and for their partial ownership of a corporation).
The nature of your business will likely determine what type of business you want to become. It probably wouldn’t make sense for a mom & pop donuts shop to be established as a corporation, but instead as a partnership, due to the simpler nature of establishing one. On that same note, an engineering firm would probably find a corporation more beneficial because of liability concerns and the ability to raise capital from shareholders.
Employer Identification Number, Tax year, and Accounting Methods
After deciding what type of business you want to be, obtain a Federal Employer Identification Number, similar to an individual’s social security number. Unsure if you need an IRS EIN, check out our previous article on this topic.
Next, designate your tax year. You can chose to follow the calendar year or go by a tax year of 12 months, such as designating a date in the middle of the year as your company start date. For example, you can decide your company’s start date as August 18, which would mean your annual filings would be centered around that time going forward.
You also must choose an accounting method between a cash basis or accrual basis. You may have come across these terms in an accounting class. Basically, being on a cash basis means you record cash income as it is received, while the accrual method means you record income as it is earned but may not necessarily be received at the time, such as money earned from a long-term contract. Most small businesses go with a cash basis for simplicity.
Recordkeeping
All businesses should strive to accurately maintain records. This will be needed when filing your annual returns and can help you in case the IRS audits your tax filings. Most small businesses use accounting software like QuickBooks to keep track of their transactions and maintain a physical filing bin for their business files, such as a business charter or other founding documents. Are you curious to find out how long you need to keep your business records?
Did you find this article informative? MiklosCPA is a Southern California CPA firm with knowledge and experience in helping businesses properly prepare their taxes. Follow us at our social media pages such as Facebook and Google+ for future tax tip articles.
MiklosCPA is a top-rated cloud-based Certified Public Accounting firm in Los Angeles, Orange County, California serving small businesses and start-ups.
