A few words of caution regarding entertainment expenses

It’s…The Holidays!  Many people – including business owners – entertain around the holidays.  They throw big parties at home.  They host big dinners in restaurants.  The difference between “people” and “business owners” is that business owners try to take a tax deduction for these entertaining expenses.  The IRS knows this, and has developed a pretty cut-and-dried response.

Essentially, if your guest list includes other business people, your entertainment expenses may be deductible on a pro rata basis.  In English, this means you need to add up the total expenses for the party, divide by the total number of guests in attendance, and then multiply by the number of business people in attendance.

When start-up expenses don’t count

You know the perfect new business. It’s right up your alley. You spend nearly a thousand dollars on a fancy lawyer who registers your name, gets you a federal ID, and establishes you in Delaware (for tax purposes, of course!) as well as your home state. You even spring for a p.o. box and slick business cards. Maybe even buy a slim new top-of-the-line laptop.

But then life gets in the way. You meant to run ads. You wanted to hire a salesman. You were going to order inventory. Heck, you were going to make Real Money so you could quit the day job. But after three or four years…nothing.

Consider this. Let’s say I dig a foundation intending to build a house, but I never do anything beyond arranging for the delivery of several dozen pallets of block. Or I buy a dress pattern and cloth intending to make a dress, but after I lay it out on the table, I never even cut the cloth. Or I take books out of the library but don’t open them. Or I register for classes but never show up.

In honor of Veterans Day 2015, I am sharing an article written by Father Dennis Edward O’Brien, USMC.  It is reprinted in its entirety.  And I say thank you.

What is a Veteran?

By Father Dennis Edward O’Brien, USMC

Some veterans bear visible signs of their service: a missing limb, a jagged scar, a certain look in the eye. Others may carry the evidence inside them: a pin holding a bone together, a piece of shrapnel in the leg or perhaps another sort of inner steel: the soul’s ally forged in the refinery of adversity.

Except in parades, however, the men and women who have kept America safe wear no badge or emblem. You can’t tell a vet just by looking.

How to head off under-withholding penalties

Let’s say you run a business, and take a small salary.  And let’s say you had a great year!  If your business is an LLC or S Corp, or even a sole proprietorship, that great year is going to find its way to your personal 1040, and you’re going to have to pay tax on it.

But you’re already contributing with withholding from your small salary, right?  Isn’t that good enough?  Well, if it’s been enough in prior years, and this year is especially good, then probably not.  And not only will you owe income tax and self-employment tax, but you may be subject to underpayment penalties.

The IRS (and the State of New Jersey, as well as most other taxing jurisdictions) expects you to contribute “ratably” throughout the year, just like a W2 employee.  It goes like this:  a W2 worker has taxes withheld every time he or she gets paid.    If the paycheck is large, the government gets more.  If the paycheck is tiny, the government gets less.  But either way, the government gets its cut way before April 15.  And they want this from the self-employed community, too.

Are you ready?

Haunted Hayrides.  Reruns of creepy classics.  Grocery store clerks dressed up as Frankenstein.  It must be the scariest time of the year, right?

No.  The scariest time of the year, for way too many people, is tax season.  This is because way too many people fail to plan for the inevitable.  That’s right:  you’re going to pay taxes whether you like it or not, so why not take control of the situation?  Find out in advance what it’s going to look like.  See if there’s anything you can do, now, to ameliorate the situation.

This little gem is the best business book I’ve ever read. In fact, I reread it periodically. Unlike most business books, it is not merely a collection of bumper sticker wisdom where all the best parts are collected for you in the Table of Contents. No, this is a book you should read carefully and slowly, with pen and paper handy for notes.

In one of my favorite parts, Bob Pritchett explains that a business has to choose between pricing (as in, how low can you go), service (as in, waiting on people hand and foot) and quality (as in, the latest labels or trends). Indeed, this is a problem I see business owners fighting on a regular basis. An IT guy will try to beat the perceived competition on price while still offering employee-level service…and go broke. A gift shop will scour the world for unique items, sell them at near-break-even prices…and wonder why they can’t pay the rent. Face it: you can’t compete on all 3 levels at the same time. That is, not if you want to succeed!

How and when to take a meal expense when you are an employee

Employees sometimes have business expenses. Typically, these are union dues, uniforms, education, and professional licensing, education, and insurance. It is rare for an employee to entertain clients without being reimbursed by the employer, but it is possible.

It is more likely for an employee to incur a meal expense while traveling for business. In this scenario, there is usually a reimbursement, but the reimbursement does not cover the full cost. Like the items listed above, any expense that is not reimbursed is a possible tax deduction. But that does not mean anything you eat or drink while at the seminar in New Orleans is business related! Those cute little bottles on the flight and in the mini-bar of your hotel room are not meals and do not count. A mid-afternoon ice cream, candy bars from the hotel store, and espresso in the lounge are also not meals. Meals are breakfast, lunch, and dinner. Skip breakfast and go drinking after class? Don’t try it: your documentation will out you.

What about eating at your desk?

In a word:  NO!

Remember that pb&j that you slapped together at home this morning and then stashed in your bottom drawer?  You don’t get to take that as a business expense, so why would anyone think it counts if you have a deli sandwich delivered in the middle of the day?

Well, actually there is a precedent.  Let’s say there’s a big project, and the boss is worried about the deadline.  The boss just might spring for Chinese to encourage the team to stay late.  This counts!  Check it out –