Small Business CPA

Making Sure Business Entertainment Expenses Yield Deductions

2009-12-01T05:53:00.000-08:00

Many businesses consider the occasional wining and dining of customers and clients just to stay in touch with them to be a necessary cost of doing business. The same goes for taking business associates or even employees out to lunch once in a while after an especially tough assignment has been completed successfully. It's easy to think of these entertainment costs as deductible business expenses, but they may not be. As a general rule, your company can deduct meals and entertainment as a business expense only if specific conditions are met. What's more, the deduction for either type of expense generally is limited to 50 percent of the cost.

Meals and entertainment directly connected to business. To be considered directly connected to business, the meal or entertainment event must meet three conditions:

* It must have been scheduled with more than a general expectation of deriving future income or a specific business benefit from the event. In other words, a meal or dinner date arranged for general goodwill purposes does not qualify.

* A business meeting, negotiation, or transaction must actually occur during the meal or entertainment, or immediately preceding and following it. In other words, business actually must be discussed.

* The main character of the event, considering the facts and circumstances, is the active conduct of your company's trade or business.

For example, an executive employee who treats a client to a golf game in order to discuss the general parameters of a business deal in an informal atmosphere is engaged in entertainment that is directly connected to business. So is a manager who discusses sensitive business plans with a subordinate over lunch at an off-premises restaurant.

Applicable limitations. In general, only 50 percent of expenses incurred for entertainment and meal expenses is deductible. A limited exception applies to entertainment or on-premise meals provided to employees.

Expenses with respect to entertainment facilities generally are not deductible at all. A facility includes any item of personal or real property owned, rented, or used by a taxpayer if it is used during the tax year for or in connection with entertainment. They include yachts, hunting lodges, fishing camps, swimming pools, tennis courts, bowling alleys, automobiles, airplanes, apartments, hotel suites and homes in vacation resorts.

Country club dues are not deductible (although the meals purchased with business clients at the club are, up to the 50 percent limit). Deductions for skyboxes or other private luxury boxes at sporting events are limited to the face value of a nonluxury box seat ticket multiplied by the number of seats in the box.

Record-keeping requirements. Even if a meal or entertainment expense qualifies as a business expense, none of the cost is deductible unless strict and detailed substantiation and recordkeeping requirements are met to the letter. A carefull review by your CPA can help you determine how to comply with these requirements at minimum cost and expense, and how your company's typical meal and entertainment expenses fare under the deduction rules.

Starting a Business - What to Consider

2009-07-02T16:12:00.000-07:00

Before you start a new business, there are a number of preliminary decisions to be made. One of the first choices you will face, is the legal form in which you will operate the business. Should it be an unincorporated sole proprietorship, a partnership, a limited liability company, a regular corporation, or an S corporation? Each of these forms has both tax and non-tax advantages and disadvantages that must be weighed in conjunction with your own plans and personal situation.

Sole proprietorships, for example, are the easiest and cheapest business form to set up, and they can be operated with few formalities. However, they offer no personal liability protection and don't allow you to get many of the tax benefits that are available to corporate employees.

Partnerships offer many of the same advantages and disadvantages as the sole proprietorship, but they allow the business to be owned and run by more than one person. Also, the liability problem can be overcome to a certain extent by forming a limited partnership, but partners whose liability is limited cannot be involved in actively managing the business. And losses from these partnerships may be restricted by the so-called passive activity rules .

A newer form of entity, known as the limited liability company, which is approved for use in almost every state, offers what many see as the best alternative for the typical small business. These entities can be set up to be taxed as partnerships, avoiding the corporate income tax, while the managing members' personal assets remain fully protected from business creditors.

S corporations also offer liability protection, without a separate corporate tax. Like partners and sole proprietors, however, more-than 2% S corporation shareholders are ineligible for tax-favored fringe benefits. Another potential drawback of S corporations results from limitations on the number and kind of permissible shareholders. These restrictions can limit an S corporation's growth potential and access to capital in some businesses. In others, however, an S corporation can be a key ingredient toward success.

What about regular corporations, known as C corporations? They do not have the shareholder restrictions that apply to S corporations, but they are subject to a double system of taxation. That is, their profits are subject to income tax at the corporate level, and are also taxed to the shareholders if distributed as dividends. But if profits are to be plowed back into the business to foster the company's growth, the tax price is usually lower than with an S corporation. And there are many situations in which the double tax can be substantially minimized. An advantage to this form of operation is that shareholder-employees are entitled to tax-advantaged corporate-type fringe benefits, such as medical coverage, disability insurance, and group-term life.

Besides the question of choosing a form of entity for your new business, there are many other tax decisions to be made, and much planning to ensure that you meet your income and payroll tax reporting and compliance chores properly. How will you handle your start-up costs? Will your workers be employees or independent contractors? Can you qualify for a home office deduction? Should you set up a qualified retirement plan, and, if so, what kind?

2009 Recovery Act: NOL Carryback Period Extended

2009-07-02T16:08:00.000-07:00

As you may know, NOLs can generally be carried back two years and forward 20 years. The carryback and carryover periods are determined by the law applicable to the year in which the NOL arises, rather than any of the years to which it is carried back or forward. An NOL that is not utilized within its statutory time-frame expires without providing any tax benefit.

The American Recovery and Reinvestment Tax Act of 2009 (2009 Recovery Act) provides relief for small business owners by extending the maximum carryback period for 2008 net operating losses (NOLs) from two years to any number of years greater than two and less than six (i.e., three, four, or five years). The number of years selected for the carryback is discretionary within these parameters, but the election must be properly executed in a timely manner and cannot be revoked.

Fiscal-year businesses can apply these rules either to NOLs generated in tax years ending in 2008, or to NOLs generated in tax years beginning in 2008. If a small business has already waived an NOL carryback for the applicable 2008 tax year, the election can be revoked in order to obtain NOL carryback relief under the 2009 Recovery Act provisions. However, the prior election must be revoked and the new election executed within 60 days of the legislation's enactment.

Because you sustained an NOL, these provisions present an opportunity for an immediate refund of prior year taxes paid.

The Intuit Community Blog

2009-07-02T14:18:00.001-07:00

The Intuit Community Blog

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Small Business Blog from Microsoft

2009-07-02T14:11:00.001-07:00

Small Business Blog from Microsoft

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2009-07-02T13:20:00.000-07:00

Hello,

I am a CPA looking to help Small Business owners successfully navigate through our current economic downturn. I have several years of experience partnering with small business owners by getting their books in order through the use of Quickbooks accounting software and implementing a continuous process of managing the businesses finances and taxes through the use of tax planning and regular operational finance reviews to ensure the business stays financially sound and healthy.