When it comes to running a business, there are few thigs more daunting and complex than bookkeeping and accounting. This is even more so the case when dealing with multi-national companies that have interests and investors around the globe. For that reason there are generally accepted accounting principles (GAAPs) which act as guidelines for writing and maintaining financial statements. But what...
Company events such as work parties, company presentations, anniversary celebrations, and company lunches all have this one thing in common: They need to be well organized. In addition to scheduling, sending out invitations, designing the program, and procuring catering for the participants all play an important role. Neither employees nor business associates should leave feeling hungry or unsatisfied with the menu choices.
But in the endeavor to offer all employees and guests a wide selection of delicacies, it’s important to not lose sight of the cost factor. For this, it helps to make sure that all meal and entertainment expenses are entered correctly into your books and credited correctly in your tax returns. This guide will advise you on how to proceed and what to look out for.
The first step: An appropriate accounting system
To be able to properly organize your business events, you first need a proper accounting system. This is a prerequisite for the creation of a detailed and individualized account plan that includes all of your company accounts. It’s an integral part of the double-entry bookkeeping system.
The accounting system is only the foundation of your bookkeeping plan. In order to customize it, you still need the necessary know-how. As the software doesn’t provide a full support system, it may be necessary to hire a third-party expert accountant to fully utilize the accounting software.
How to properly record business entertainment expenses
Before you start recording your business entertainment expenses and their corresponding tax deductions, you must be aware that the IRS will only allow deductions for 50% of meal and entertainment expenses. These expenses have to meet the guidelines presented by the IRS and be both “ordinary and necessary” according to one of these two tests:
- The directly-related test shows that the main purpose of the activity was business, i.e. took place in a setting that was clearly business-related and had more than a passing connection with generating income or future business as a result of the activity. Meeting clients for lunch in your office would be an example of meal expenses that would meet the “directly related” requirements.
- The associated test applies if the expense is associated with a “substantial business discussion” or actively conducting business. This means expenses with the purpose of acquiring new business and encouraging the continuation of an existing relationship. It’s not necessary for business to be discussed during the activity for it to count as substantial. An example would be entertaining business guests at a nightclub the night before a business discussion. This could qualify for the associated test.
Recording expenses accurately and in full will help determine which expenses are included in the 50% limit and where your tax deductions apply.
Where to display expenses on your tax return
Depending on which expenses you’re trying to deduct or what kind of business you run, business entertainment expenses will be listed in a number of places. Topic 512 in the IRS outlines which forms will need to be filled out in different circumstances, and Publication 463 goes into more detail on what qualifies as a deductible expense and what doesn’t.
As an employer, there is no need to include reimbursement in W2 forms for employees with substantiated and reimbursed expenses on an accountable plan. If the reimbursements exceed the accountable plan, if they were included on a non-accountable plan, or if they don’t exist at all, then either Form 2106 or Form 2106-EZ is used to deduct entertainment expenses. Some expenses may also qualify as Itemized Deductions, which are entered on Form 1040, Schedule A and adjusted according to Topic 508. Expenses for self-employed persons or farmers can be filed using forms 1040 Schedule C, 1040 Schedule C-EZ, or 1040 Schedule F. Corporations refer to the “Deductions” section of Form 1065 for recording expenses.
Regardless of the source of the expense, you’ll only be able to properly claim tax deductions if you can prove they occurred in the appropriate form and with valid records. The IRS will only acknowledge the validity of deductions that are submitted along with the appropriate documentation.