As a small business owner, the idea of writing off as much expenses to reduce your tax liability is very appealing. This article discusses some legitimate way to maximize business deductions especially those around meals and advertising. Good planning can help you maximize your deductions without worrying about the IRS knocking at your door. Some ways to maximize deductions are:

Taking 100% deduction for meals rather than 50%

Generally, business-related meal and entertainment expenses are subject to the 50% limit. However, your meal or entertainment expense is not subject to the 50% limit if one of the following exceptions apply:

Reimbursement under an accountable plan

If your business has an accountable reimbursement plan, meals reimbursed to employees under this plan are not subject to the 50% limitation. As the employee receiving this reimbursement, you are also not subject to the 50% limit.

Invoice the client

Meals and entertainment invoiced to the client with substantial evidence are not subject to the 50% limit. In other words, your client or customer reimburses you these expenses as part of the services you provide.

Also, If you are an independent contractor and have expenses for meals and entertainment related to providing services for a client and adequately account for and seek reimbursement from the client for those expenses, you are not subject to 50% limitation.

Advertising expenses.

You are not subject to the 50% limit if you provide meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in your community. For example, the expense of distributing free food and beverages to the general public is not subject to the 50% limit.

You are also not subject to the 50% limit if you pay for a package deal that includes a ticket to a qualified charitable sports event.

Promotions and Gifts

To get 100% write off for marketing expenses you are better spending your advertising dollars as promotions and gifts rather than meals and entertainment. With promotions and gifts you get the full deduction.

Also events you put together for marketing purposes are fully deductible as long as you do not attend. For example, sending your sales team to take potential clients to work, will not be subject to the limitation.

If you want to treat your clients to a meal, you can send them gift cards as a gift. The gift expense deduction is limited to $25 per client but not subject to the 50% limitation.

However, gifts do not include items that cost $4 or less and has your company name imprinted on it. These are considered promotional items and should be listed under advertising expense.

Record Keeping

Good record keeping is essential to proofing these deductions in the case of an audit. Documenting evidence ordinarily will be considered adequate if it shows the amount, date, place, and nature of the expense. For example, a restaurant receipt is enough to prove an expense for a business meal if it has all of the name and location of the restaurant, number of people served and date and amount of the expense. Cancelled checks alone are not enough to substantiate expenses. There must be other evidence to show the business purpose. For example a bill, an informational letter, etc.

The records kept must be on a timely basis. A timely kept record has more value than records put together after the fact. The IRS is not obligated to accept records that were pieced together just before an audit.

As always contact your tax advisor for more specific advice.

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