As you work through the budgeting process in the lead-up to 2016, pay close attention to some of your business’s under-the-radar expenses. For example, take your business development spending: Are you tracking what you and your employees shelled out in the meals-and-entertainment category this year? You might think those dollars are recouped in tax deductions but that is not always the case.
You may be surprised to see how quickly seemingly small business expenses add up to big amounts–some of which are tax-deductible while others are not. In the case of certain types of spending, consider whether the “investment” yields enough positive return to justify the expense. Review these two common, potentially tax-deductible business expenses and be sure to include a reasonable allowance for them in your budget this year.
Meals and Entertainment
Many businesses rely heavily on networking and negotiating over fancy dinners and rounds of golf. The IRS recognizes this and has a policy for deducting portions of these expenses—but within limits. In general, the tax code permits a deduction of up to 50 percent of unreimbursed business expenses. And its auditors look closely at facts like the guests in attendance, whether the venue is conducive to business discussion, how much alcohol is involved, and if the spending qualifies as “lavish” or “extravagant” to determine if the deduction is legit.
While the guidelines are fairly inclusive for what qualifies as entertainment, they are very specific about circumstances that are not necessary for conducting business, including a meeting with a group that included non-business associates at a venue like a country club or a collegial dinner with business or industry associates for which you picked up the full tab.
Review your business’s spending in this category to assess what percentage is really deductible and how much it is costing you on an annual basis. If spending is increasing disproportionately to revenue, it might be time to rein things in.
Charitable Donations
Many small businesses are extremely generous when it comes to supporting local community organizations and charities. But they often face confusion when tax season rolls around and an accountant informs them that many of the contributions are not deductible.
IRS guidelines regarding charitable deductions are very specific—not every nonprofit fits into the tax-deductible category. For example, some social welfare organizations do not qualify, and donations that come with something in return—say, a ticket to a charity gala that serves dinner or a start-up fundraising campaign that rewards supporters with T-shirts, free services, or early versions of a product—cannot be fully deducted. Another surprise exclusion is volunteerism: Donating your time or your services pro bono does not equal a deduction for the equivalent wages (although you can deduct the cost of any supplies).
This is not to say your business should curb its donations or stop supporting local volunteer groups; but if at least some of that financial giving is motivated by the potential tax benefits, it is worthwhile to review the tax code with an accountant and plan out donations that are deductible in advance.