Common pitfalls in the area of Meals & Entertainment

No meal was ever enjoyed more than the meal you wrote off as a tax deduction.  But was it legit?

In my experience, this is one of the most abused deductions available to the small business owner.  All too often, the small business owner considers every activity a business deduction from the first step outside the home in the morning until returning to the home in the evening.  When the business owner meets a business buddy in a coffee shop, and they each buy a sandwich and eat together companionably, they each believe they’ve just had a deductible business meal.   If the business owner is on a trip, every cup of coffee, and even the tiny little airplane cocktail get tallied up for a meal reimbursement.  Sadly, none of these are valid deductions as Meals & Entertainment.

How to properly document your meal expense

What a great lunch! You just convinced Gidget (of Gidget’s Widgets) not only to carry your patented micro-widget, but also to devote an entire edition of The Wonders of Widgets magazine to the marvels of micro-widgets. You smile broadly as you sign the credit card receipt, tuck a $7 cash tip under the water glass, and (making small talk about the frightful weather) walk with Gidget out to your respective cars.

Stop! Let’s rewind a bit, because if we don’t, you aren’t going to be able to support the meal expense. Sure, it definitely had an acceptable business purpose, and for $44.44, the meal was certainly reasonable – not too fancy, not too plain. But you’re still forgetting a few things.

First in a short series on the Meal Expense

A good old turkey club…

a crock of French onion soup…

and anything alfredo…

Everybody likes to eat, and getting to take a meal as a tax deduction only makes it sweeter. 

FBAR (pronounced eff-bar) is the acronym for the original form, Foreign Bank Account Report.  In time for the 2015 filing season, and in conjunction with the renaming of various governmental agencies, the name of the form was changed to Report of Foreign Bank and Financial Accounts, FinCEN Report 114.  (Is it any wonder it is still referred to as the FBAR?)  You can search for it on the internet this way.  Even IRS publications still use FBAR.

Effectively, it is a list of all financial accounts outside of the USA, to which your name is attached.   You might own the account 100%, or only own part of the account.  You might simply be a signer on the account, and actually own none of it.  For example, you are the treasurer for a missionary hospital that maintains a bank account in Brazil, or you and your brother are both signers on your mom’s bank accounts back home in Egypt. 

Foreign bank account reporting for folks who live in the USA

As nearly as I can tell, if tax forms had Facebook friends, this one would have the fewest. It only applies to people living in the USA who keep money in banks that are located outside the USA. Many of these people don’t even know they are subject to FBAR (pronounced eff-bar) reporting. The form is only available online. Filling it out probably won’t result in taxes, but not filling it out can result in fines and penalties.

The obvious question is, if it’s not a tax form that collects taxes, why is it a tax problem? I’ll share my understanding. If you are living in the USA, the USA wants you to pay income tax. The USA expects that you should pay income tax on whatever income you received during the year, regardless of the source. The source might be a W2 job in Mullica Hill, or interest from a bank in Mays Landing, or your share of the net income from a partnership in Mount Laurel. But it could also be some kind of income from a holding back home in Mexico or Mozambique. (They even expect you to pay income tax on income that you received from an illegal source, but that is outside the scope of this article.)