By Mark E. Battersby / Published November 2019
Taxes can be fun? Well, not exactly, but our federal tax rules do permit write-offs and deductions for a number of enjoyable activities, events, and other expenditures made by a pressure cleaning business in the pursuit of income, happy employees, and contented owners. Although much has been said and written about tax deductible picnics and holiday parties, the tax rules allow deductions for many, many other enjoyable activities.
Entertainment may, in many cases, be considered a business necessity, but it can also be enjoyable. When a pressure washing contractor or business owner entertains customers or potential customers, the costs can really add up, but they are usually tax deductible—even after the tax laws were “reformed.”
The deduction for food and beverage costs incurred in the course of travel away from home were impacted by the Tax Cuts and Jobs Act (TCJA) passed in December 2017, which limited deductions for meal and entertainment expenses to 50 percent of the amount spent. Fortunately, deductions for meal and entertainment expenses remain a viable option for every pressure cleaning business.
Generally, all “ordinary and necessary” expenses of entertaining a customer or client, so long as they are not “lavish or extravagant under the circumstances,” are deductible under these circumstances:
Qualifying as meal and entertainment expenses are activities considered to provide entertainment, amusement, or recreation at a variety of places:
However, while the cost of tickets to events can be deductible, only the face value of the ticket can be deducted even if a higher price was paid. An exception is made when that higher ticket price is part of a package deal or for a ticket to a sporting event that benefits a charitable organization. Even better, the 50 percent limit on entertainment expenses doesn’t apply to any expense that is a means of advertising or promoting goodwill in the community.
Imagine an enjoyable—and educational—vacation, with Uncle Sam, in the form of our tax laws, picking up part of the tab. While—thanks to the TCJA—the business must be the one paying, every owner, partner, shareholder, or employee of a pressure washing business (even someone who is a shareholder/employee) can legitimately be reimbursed for the expenses of business travel. In other words, Uncle Sam, in the form of our tax rules, will help pay for that business trip.
The tax rules clearly state travel expenses are tax deductible if the trip was primarily business-related, such as a meeting, convention, or session with potential clients. If, on the other hand, the trip was primarily for personal reasons, such as a vacation, the cost of the trip is a nondeductible personal expense.
When vacation days are tacked onto the beginning or end of a business trip, out-of-pocket costs are usually minimal since much of the business portion of the travel could be tax-deductible. Obviously, traveling to a business meeting is work-related, and the IRS doesn’t really care whether you get there a few days early or hang around for a bit after your business is concluded. Since you had to travel anyway, the cost of transportation usually qualifies as a business expense.
The cost of travel by bus, train, or automobile, either a personal automobile or one rented by the business, is also deductible. But don’t try to slip in the price of airfare if the ticket was obtained with frequent flier miles.
To make a real mini vacation out of your next business trip, take the family along. A spouse’s and children’s expenses won’t be deductible unless they work for the pressure cleaning business and are involved in the out-of-town business meetings. The tax rules will, however, cover at least part of their expenses.
Take lodging as one example. When you share a room, the charge for added occupants typically is not double the fee for one guest. That means that for the days business is conducted, most of a family-shared room will be deductible, though your airfare only is deductible if you fly. Driving to an out-of-town meeting means the mileage is fully deductible even with your family along for the ride. Just be prepared for more diligent recordkeeping.
Every pressure cleaning business owner, operator, and manager should keep in mind the role that taxes play in gifting. Those business owners considering a “small gift” for employees—fruit baskets, hams, turkeys, wine, flowers, and occasional entertainment tickets, such as for a show or sporting event, will find they are generally nontaxable de minimis fringes and tax deductible by the business.
Many businesses give gifts to clients and customers, particularly around the holidays. What is often overlooked is that only a portion of the cost of certain gifts may be deducted as a business expense.
Basically, the IRS allows a business to deduct only $25 or less for business gifts given to any one individual during the tax year. Any amount of expense in excess of $25 is disallowed as a deduction. So, if a customer or client is given a $50 watch as a gift, only $25 may be deducted.
Gifts made to corporations or to business entities which are intended for the personal use or benefit of an individual (such as the president or purchasing manager) or a small class of individuals are treated as having been made to the individual or individuals who actually benefit from the gifts.
Some items are, of course, exempt from the gift limitations. Gifts of key chains or pens with the business’s name and/or logo on them to customers and clients are not considered gifts. In a nutshell, the following items are exempt from the $25 limit that normally applies to business gifts, and their cost is deductible without limitation:
On the downside, employee incentive awards are generally taxable fringe benefits. Thus, awards such as merchandise or a vacation trip are non-cash fringe benefits that are taxable to the employee and deductible by the pressure washing business.
The incentive award rules don’t apply to non-cash employee achievement awards of tangible personal property made for length of service or safety. These awards are deductible by the employer and can be excluded by the employee with certain limits.
So-called non-cash “de minimis” fringe benefits, such as traditional birthday or holiday gifts of property with a low fair market value, or occasional gifts of theater or sporting event tickets, are deductible by the employer and tax-free to employees.
Although the TCJA cracked down on deductions for entertainment, a pressure cleaning business can still write off the full cost of a holiday party, company picnic, or barbecue—at least if certain requirements are met. This can be a good way to help build company morale on Uncle Sam’s dime.
Deductions for meals and entertainment, travel away from home, business gifts, and, yes, parties, require a higher level of substantiation than many other business expenses. A notable exception preserved by the TCJA allows a business to deduct 100 percent of the cost of a company get-together while remaining tax-free to employees. The important thing to remember is that all employees must be invited. The business cannot limit attendance to corporate officers or high-ups. It has to be everyone.
Should a few friends crash the party, this in and of itself won’t jeopardize the deduction, although all expenses attributable to social guests are nondeductible. Suppose, for instance, 20 employees and their significant others, plus five couples who are friends, are invited to a picnic, party, or other event costing $10,000. Under the rules, based on 40 business guests out of 50 people, 80 percent, or $8,000, of the expense can be written off.
Under our tax rules, entertainment expenses must be “primarily” for the benefit of employees other than a so-called “tainted group.” The tainted group consists of any employee paid more than $110,000 a year, a 10 percent owner, or any family member of a 10 percent owner.
The cost of occasional parties is nontaxable to employees and their families as a de minimis fringe—if they are infrequent and for the purpose of promoting employee health, good will, contentment, or efficiency. Thus, occasional holiday celebrations, cocktail parties, and company picnics are fully tax deductible by the pressure washing business, not subject to the 50 percent limit on business meals, and can be ignored taxwise by the employee. It is, however, always a good idea to consult a tax advisor.