fbpx

Financial: Tax Write-Offs for Fun and Games

Financial: Tax Write-Offs for Fun and Games

By Mark E. Battersby / Published January 2024

Uncle Sam, in the form of tax deductions, is helping foot the bill for some of the more enjoyable aspects of doing business. Yes, enjoyable as when Uncle Sam picks up part of the cost of a pressure cleaning operation’s holiday parties. Or, when tax deductions reduce the out-of-pocket expense of worker rewards.

Entertaining employees—and even customers and prospects—can be both enjoyable and partially compensated for with tax write-offs. There are also write-offs for gifts given to workers, customers, and prospective customers although, like many otherwise fun aspects of the tax rules, there are a number of potential pitfalls.

IT’S PARTY TIME

What could be more enjoyable? A tax deduction for business entertainment is available to help with the cost of holiday parties or picnics. The parties can’t, of course, exclusively benefit owners, shareholders, or highly compensated employees, but parties thrown primarily for the benefit of all employees are 100 percent tax deductible.

The IRS requires that the party occur for an “ordinary and necessary” reason. This reason can be anything from “celebrating an important deal” to ”improving team relations.” As long as it can be shown that the party was a necessary expense of the pressure washing business, the IRS will usually approve it.

Thus, a party, company picnic, or other event hosted for the sole benefit of employees and their families is 100 percent tax deductible by a pressure washing business. In fact, employee parties (whether holiday or otherwise), picnics, outings, and team-building events all qualify for a 100 percent write-off.

While things such as golf expenses and sports games cannot be deducted, there are a number of entertainment-related deductions for holiday parties, picnics, and events such as reward trips. The rules also cover expenses for business meetings, conferences, etc.

Going one step further, by structuring events properly and meeting the tax law’s requirements, a pressure washing business can show its appreciation of its customers with a 100 percent deduction. After all, tax deductible business entertainment expenses can also apply to customer appreciation parties, client appreciation events, and grand opening events as well as employee parties and picnics.

BUSINESS ENTERTAINMENT

The cost of meals provided to customers, clients, or prospects, even if the meal is the entertainment or it’s part of other entertainment (refreshments at a football game, for instance), are considered “entertainment expenses.” Unfortunately, the tax deduction for business meals and entertainment is now only 50 percent instead of the 100 percent deduction allowed over the last few years.

Business entertainment expenses, including deductions related to entertainment facilities, are usually not deductible. Generally, meal expenses are not deductible unless a representative from the pressure cleaning operation, such as an owner or an employee, is present during the furnishing of the food or beverages. Naturally, such expenses can’t be either lavish or extravagant.

THE WRITE-OFFS

What can a pressure washing contractor or equipment business deduct on their tax return? The following are either 50 percent or 100 percent deductible:

  • Business meals with customers, clients, or prospects (50 percent)
  • The cost of meals while traveling for work (50 percent)
  • Meals at a conference that exceed the ticket price (50 percent)
  • Lunch out with less than half of the operation’s employees (50 percent)
  • Office snacks and other food items (50 percent)
  • Food for the operation’s holiday parties (100 percent)
  • Food and beverages given out free to the public (100 percent)
  • Dinner for employees working late (100 percent)
  • Concerts, golfing, sporting events, etc. (zero percent)
  • Meals, groceries, and snacks for the pressure washing business owner or his or her family (zero percent)

EMPLOYEE GIFTS

When it comes to gifts given to employees, generally anything of value transferred to that employee is taxable income, deductible by the business but subject to income and payroll taxes. There is, however, an exception for noncash gifts that qualify as a “de minimis” fringe benefit.

So-called de minimis fringe benefits are small value items that are given infrequently and are admiratively impractical to account for. Holiday turkeys, hams, gift baskets, and occasional sports or theater tickets (but obviously not season tickets) and other low-cost merchandise are common examples of de minimis fringe benefits.

Although de minimis fringe benefits are not included in an employee’s taxable income, they are still fully tax deductible by the pressure cleaning business. And, unlike customer gifts, there are no dollar limits for de minimis gifts although many businesses use an informal cutoff of $75.

Cash gifts, as well as cash equivalents such as gift cards, are included in an employee’s income and are subject to payroll tax withholding regardless of how small or infrequent they are.

SPREADING THE WORD AND ENJOYMENT

Unlike gifts to employees, gifts to customers and clients are tax deductible up to a maximum of $25 per recipient per year. So-called “incidental costs” need not be included in that $25 limit so long as they do not significantly increase the value of the gift.

Engraving, gift wrapping, and packaging and shipping are all included in the price. Branded marketing items, such as those imprinted with the operation’s name and logo, are also exempt from the $25 limit so long as they are widely distributed and cost less than $4.

That $25 limit applies to gifts made to individuals. There’s no set limit on gifts to a business (a gift basket for all team members of a customer to share, for instance), so long as they’re “reasonable.”

Group of people have an outdoor cookout

ENTERTAINING TAX DEDUCTIONS

The tax deductions for business meals and entertainment have reverted to their old levels. Thus, most business meals are now 50 percent deductible instead of 100 percent tax deductible as they were the last couple of years. In fact, most entertainment expenses are no longer deductible period.

That’s right; in general, entertainment expenses are no longer deductible. This includes the cost of bringing customers to a football game or other sporting event, offering a prospective customer or client free theater tickets, or taking an old client on a sunset cruise.

According to the IRS, “entertainment” is defined as any activity generally considered to provide entertainment, amusement, or recreation. This means a business cannot deduct the costs of renting out an “entertainment facility such as a bowling alley, yacht, fishing camp, swimming pool, or hotel suite.” Also non-deductible are the costs of membership dues such as those for country club memberships.

Fortunately, there are strategies that can enable a business to avoid the tax law’s restriction. For example, recreational expenses for employees such as a holiday party or summer picnic are still deductible. Entertainment, which is treated as compensation, can still be deducted. And, don’t forget, expenses related to attending business meetings or conventions of certain exempt organizations such as business leagues, chambers of commerce, and professional associations remain legitimate deductions.

FRINGES AND REWARDS

While the tax rules today are not quite as generous as those in recent years, some tax-free employee fringe benefits remain, including meals provided for the employer’s convenience (not deductible by the employer after 2025), achievement awards (with the exception of cash, gift cards, vacations, meals, lodging, theater or sporting tickets, and stocks or bonds), employee gyms, and even retirement planning help.

As a general rule, incentive prizes and awards earned by individuals based on sales goals, performance, learning, or other work-related services are considered to be taxable compensation, regardless of the type of reward earned, such as cash, merchandise, or travel. According to the IRS, a qualified awards program is one with written guidelines, including a specific list of possible awards and the conditions for getting them.

For the purposes of withholding taxes, a noncash award is a fringe benefit. Cash, including cash surrogates and cash equivalents (gift certificates, vouchers, or charge or credit cards) must have appropriate taxes withheld regardless of their amount.

DOCUMENTING IT ALL

In order to deduct any expense, the pressure washing operation must, of course, have taxable profits from which to deduct them. What’s more, deductions such as that 100 percent deductible employee party or picnic must be documented.

When documenting the expenses for an employee party, outing, or other type of event, the business purpose should be noted. If it’s an annual event to improve employee morale and loyalty, it should be written down. If there’s a more specific reason, such as an office party to celebrate a new contract, record it.

FINALLY

Taking business customers, clients, and prospects out allows a business to deduct the expense so long as business is discussed during the meeting, and it takes place in a business setting. But the business can also deduct as much as 100 percent of the cost of some social events held for the operation’s employees.

Many of the products and services related to operating a business are tax-deductible. This includes supplies, subscriptions to professional journals, and even a reasonable amount for office decorations such as potted plants.

So, what about the cost of decorating the office or shop for a holiday party? Qualifying for that tax deduction and so many others under our ever-changing tax laws may make professional advice a necessity.

Current Digital Issue

Click to read.

Past Digital Issues

Click to read.
.

Archives

May 2024
April 2024
March 2024
February 2024
January 2024