How to Read Your Income Statement

The income statement of any business is probably the most important report of all. It is a snapshot of the financial performance of your business over a period of time, such as a month or year. You might also hear it called the Profit and Loss Statement, or P&L.

The income statement can give you all kinds of insights as to whether you are bringing in enough sales, if your prices are generating enough profit, and how your expenses are running. Let’s take a look at the report, step by step.

Revenue

The report starts by listing the revenue for the period of time covered. Revenue includes all sources of income, including sales from operations, interest and investment income, revenue from insurance claims, sales from assets or other parts of the business, and any other source of revenue. In most small businesses, sales will be the largest part of the revenue, if not all of it. In some countries, the term used for sales is turnover.

If you sell more than one item or have more than one location, it might be a good idea to be able to view the sales detail from these categories. This may or may not be on your income statement depending on how formal it is, but you should be able to get a drill down report on your sales detail.

Look for exceptions to what you expect to see. There can be some decisions you can make and actions you can take from the insights you discover.

Cost of Goods Sold

This section of the income statement includes costs you incur directly on items you sell. If you maintain an inventory, it’s the cost you paid for the inventory items that you sold during the period. If your business is a manufacturer, cost of goods sold, or COGS, will include costs of materials and labor to produce the items.

If you own a service business, COGS will typically be zero. As a service business, you may incur direct costs when providing services, and these costs can be booked in a variety of expense accounts, including supplies.

Gross Profit

Some income statement formats will include a gross profit number which is sales minus cost of goods sold. This number is important for businesses with inventory.

Expenses

The expenses section of the income statement is the longest part. It includes all of the expenses you incurred in your business, including advertising and marketing, rent, telephone, and utilities, office supplies and meeting expenses, travel, meals, and entertainment, payroll and payroll taxes, and several more.

You might also hear the term overhead. Overhead is a subset of expenses that have to be met whether you sell zero items or millions. They include items like rent and utilities, management payroll, and office supplies.

To review your expenses, check line by line to see if anything looks out of sorts, and take the appropriate action.

Net Profit or Loss

The final number on your income statement represents whether you made or lost money in the period the report covers. The formula is simple: revenue less COGS less expenses equals net profit or loss.

Net profit/loss can go by many names, depending on the size of your business and your accountant’s vernacular. You may also see EBITDA: Earnings before interest, taxes, depreciation, and amortization. Earnings is another word for net profit.

Perspective

It’s a good idea to compare your income statement numbers to other periods in your business. Common comparisons include last period, last several periods, and same period last year.

It’s also a great idea to have a budget that sets goals for your income statement numbers. Then you can compare budget to actual numbers and take action on the variances.

If your business falls into a standard type of business, you may also be able to see how it is doing compared to others in your industry. This is called benchmarking, and the income statement is a very common format that’s used in benchmarking.

Do spend some time each period reviewing your business’s income statement. It can help you make a faster course correction in your business so you can be even more successful than you already are.

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New Tax Brackets in 2018

The 2017 Tax Cuts and Jobs Act revised some foundational deductions, exemptions, and tax brackets for the 2018 tax year. Here’s a rundown of what’s changed in that area for individuals:

Exemption

On your 2017 1040 tax return, you likely received an exemption of $4,050 per person.  Check line 42 of your own return. In 2018, this exemption is discontinued, but you won’t really lose out because the standard deduction has increased to compensate for this elimination.

Standard Deduction

In 2017, your standard deduction was $6,350 per person in general and $9,350 for head of household.  In 2018, the standard deduction will increase to $12,000 per person and $18,000 for head of household filers.

Quite a few itemized deductions have been eliminated or capped for 2018, so more taxpayers will be using the standard deduction going forward.

Tax Brackets

There are seven tax rates or brackets, just like there were before, but the threshholds and rates have changed. The rates now range from 10 percent to 37 percent:

  1. 10 percent
  2. 12 percent
  3. 22 percent
  4. 24 percent
  5. 32 percent
  6. 35 percent
  7. 37 percent

Here are the details depending on your filing status:

The new withholding tables are posted here:

https://www.irs.gov/pub/irs-pdf/n1036.pdf

If you have questions about this or anything about the new law, please feel free to reach out any time.

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Five Fun Customer Perks to Set You Apart in the Marketplace

It’s always fun to surprise and delight your customers. This puts a smile on your client’s face, boosts loyalty, and is fun for your employees too. Here are five ways to surprise and delight your customers with inexpensive perks.

1. Handwritten thank you note.

Email and social media have all but killed the handwritten thank you note. So when you send yours to your top customers, it will really stand out.

2. Promotional items.

Promotional items are frequently handed out at trade shows, but they can be used in other settings too. These are items where your logo is typically imprinted and you purchase them in quantity. Items that are useful and popular include coffee mugs, t-shirts, fidget spinners, screen cleaners, webcam covers, keychains, note pads, calendars, and more.

Choose an item that is similar to or a reminder of your business or product. An IT consultant might choose a screen cleaner, while an accountant might choose a piggy bank.

3. Coupon bag.

If your business is located in a strip center, shopping mall, or office building with other businesses around, go door to door and ask for coupons that you can put in a coupon bag to give to clients. Clients will be delighted to get a coupon for the dry cleaners, florist, and hair salon in your center no matter what type of business you’re in.

4. Random prize.

If your business has a stream of clients coming in a physical store or a virtual one, you can award prizes randomly to customers. If customers are grouped together as in a classroom or lecture hall, it’s easy – you can hold a drawing for a prize. Or you can select a random number and the customer assigned that number wins a prize.

Choose a prize from one of your services or products, or give something away that’s universal and “hot,” such as an Amazon Echo Dot.

5. Free samples.

The cosmetics industry has been giving away free samples and gifts with certain purchases for decades. Grocery stores often have free samples of food at a little booth staffed by a host at the end of an aisle. You might be able to apply this idea to your business with a little bit of creativity.

Think of how you can “sample” your service or product and package it up in a free gift or sample. If you offer a service, you may have to get extra creative. A consultant can offer a book that’s related to the service offered, a spa can have healthy treats while clients wait, and a divorce attorney can offer stress balls or fidget spinners.

With customer service declining in many businesses, try these five things to wow your customers and set your business apart.

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The Home Office Deduction: Regular Method

Has your friend, neighbor or colleague told you that if you take the home office deduction, it will be a “red flag” to the IRS that will trigger an audit? Well, that is just not true! 2017 is the last tax year that you can take a home office deduction since the Tax Cuts and Jobs Act excludes it for tax years 2018-2025.

In order to claim the home office deduction, you MUST QUALIFY. To qualify, you are required to meet two tests: 1) regularly used and 2) exclusively used for business.

Regular Use: This test is clear – you use the area on a continuing basis. Occasional or incidental business use does not meet the test.

Exclusive Use: A specific part of a taxpayer’s home is used for business only. There is no requirement that the business portion of a room be physically separated by a wall or partition. But, any personal use of the space, no matter how small, means that it is not exclusive. There are two exceptions: storage space and daycare facility.

You can have several offices. The key issue is to determine your PRINCIPAL PLACE OF BUSINESS.

Your home can qualify as a principal place of business if:

  • The office is used regularly and exclusively for administrative or management activities (billing clients, keeping books, ordering supplies, setting appointments, writing reports)
  • There is no other fixed location where the taxpayer conducts these activities

A business use of the home deduction is allowed if the taxpayer meets clients in their home. For example, if an attorney works four days a week in his downtown office and 1 day at his home office, he can deduct the home office if he meets with his clients there too. It will qualify for the deduction even though it is not the principal place of business.

The best thing about qualifying your home as the principal place of business is that the miles that you drive from your home to the first business stop are now deductible. If your home is not the principal place of business, your first stop is considered commuting and not deductible.

The easiest way to determine the business percentage is to take the total square footage exclusively and regularly used for business and divide that by the total square footage of your home. Then, you can deduct the following categories on your return for the business percentage:

  • Mortgage interest
  • Rent
  • Property taxes
  • Utilities (gas, electricity, garbage)
  • House insurance
  • Security system
  • Home maintenance/repairs
  • Depreciation (straight line method over 39 years)

Note: Lawn care/landscaping expenses are not deductible according to the IRS regulations. However, the Tax Court allowed the deduction where the taxpayer’s clients regularly visited the taxpayer’s home office and where the taxpayer was a daycare provider and the children used the lawn as a play area.

If you painted the office area only, that cost would be 100 percent deductible. This is called direct expenses. However, if you paid for garbage for the home, only the business percentage used is deductible which is called indirect expenses.

If your total income is less than your total expenses, your home office deduction for certain expenses will be limited. However, these deductions can carry over the next year. Be aware of that carry over number if this happens in your situation.

If you take depreciation on your home office and you sell your home, you have to “recapture that amount.” What this means is that the amount you deducted for depreciation reduces your ordinary income – this is good. But when you sell your home, that amount will increase your capital gains. The capital gains rate is typically less than your personal income tax bracket.

Years ago, many tax preparers would never take the home office on an LLC, S-Corp or C-Corp return. If they did, it would be a Schedule A deduction as an employee, which is not a great deduction due to the two percent limitations. However, now some preparers are taking the home office for these entities. The only thing I recommend is not to take mortgage interest or real estate taxes. Only take the business portion of rent, utilities and insurance.

When you know the rules, there should be no fear around taking a deduction that you qualify for. So…do you qualify? If so, take the deduction, reduce your taxes, and don’t worry about that “red flag” because if you are audited, there will be no change on your return because you know the rules!

Feel free to reach out to us to determine if your specific situation qualifies for a deduction and/or to determine the impact of the new tax law changes for 2018.

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How to Evaluate Your Marketing Spend

One of the most important success factors of small businesses is the ability to generate revenue, and to do that, most businesses need to market their services and products to bring in new customers and sales. The challenge for small business is how to make their marketing dollars work the hardest, and this requires careful tracking and measurement. Here’s one way to get started tracking your marketing spending so that you can find out what’s paying back the most.

List your sources of revenue

First, determine where your sales are coming from by making a list of all the ways you are currently attracting customers. Here are a few:

  • Website via search
  • Social media
  • Google ads
  • Referrals from existing customers
  • Ad in local magazine
  • Article on Huffington Post
  • Board membership on local nonprofit
  • Chamber of Commerce membership and participation

Track your expenses by source or method

Once you have your list, it’s time to look to your accounting system. Create accounts or other types of tracking codes in your system to track expenses for each of these marketing methods. If you need our help, please feel free to reach out.

The goal of this step is to be able to get all costs associated with each of these marketing methods so that you have a total cost over time by method. Don’t forget labor: if an employee spends three hours a week updating your social media accounts, this should be included in your costs.

Determine the source of your sales

To the extent you can, match the sales that come in with the marketing source or method. In other words, if a customer knows you from the Chamber and spends $500 with you, match the $500 revenue with the Chamber marketing source. Do this for every sale you can. If you don’t know or can’t attribute the sale to any one method, then code it to an Unknown tracking code or account.

This step can be difficult, depending on your business type, especially if your customers are anonymous, as in retail or restaurant sales. However, every business can do better by asking “how did you find out about us?” to each new client that comes in and recording that answer.

For online sales, you can use tracking apps such as Google Analytics to help you measure digital marketing methods.

Do the best you can on this step, and implement procedures to capture this information as accurately as possible for future sales.

Analyze and adjust

This is the fun part. Once you’ve done all the hard work, you should be able to match sales to costs and determine the volume of sales that are coming in for each marketing method. Let’s say you found out that you are getting no sales from your nonprofit board membership, the Huffington Post article, and social media. You now have some decisions to make.

If you are doing these things solely for the purpose of marketing, you could cut them out and focus on the remaining methods. It could also mean that you need to redo your social media strategy; it’s not working now, but another strategy might. Or just one article in HuffPost is not enough, but three articles could start paying off.

At any rate, you have far more information than you did before you started, and now you can make smarter decisions about your marketing. If we can help you code and crunch all of these numbers, please reach out any time.

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Record Retention…When to Keep, When to Shred

Do you know how long you are supposed to keep documents?  Do you know when it’s safe to shred?  Having this knowledge is the first step to good recordkeeping. By following these guidelines, you can keep your documents and files organized and updated. Avoid keeping things you don’t need – or discarding something you should have kept permanently!

First—categorize your documents. Examples include past tax returns and supporting documentation, medical information, purchase contracts for large assets, legal matters, employment information, insurance records, property deeds, etc.

Second—determine how you will store your records.  Do you want to archive everything digitally?  Do you prefer to keep paper copies?  When considering how to store your records, think about worst-case scenarios such as fire, burglary, natural disaster, or even something as simple as snooping family members.  Regardless of how you store your records, they should always be easily accessible.

Third—label documents with a “keep until” date.  Refer to the table below for suggested lengths of time to keep your important documents.  Labeling files with a “destroy” date will help ensure that your records will remain organized and current.

Fourth—destroy records that are no longer needed.  To minimize the risk of identity theft, it is very important that you permanently destroy documents.  If the items are paper, shred or incinerate them.  If you have a large amount of shredding, consider taking it to a shredding facility.  Occasionally, community organizations will offer complimentary document shredding on specific dates.  If your documents are stored on a computer, use specialized software to remove files or delete an entire hard drive’s data.  Another option is physically destroying the hard drive if you plan to stop using the computer entirely.

Having a system in place for your record retention will not only make it easier to locate important documents quickly and keep unnecessary documents to a minimum, but it will also give you something priceless—peace of mind.

TYPE OF RECORD SUGGESTED LENGTH OF RETENTION
 

Business Records

 

 
I. Accounting Records  
Bank Statements & Deposit 3 yrs
Individual Payroll Records 8 yrs
Payroll Timecard/Sheets 3 yrs
Expense Reports 6 yrs
Accounts Payable and Receivable Reports 6 yrs
Trial Balance Reports 6 yrs
Payment Vouchers (all) 8 yrs
All Canceled Checks 8 yrs
Audit Reports 7 yrs
General Ledgers and Journals 7 yrs
II. Sales, Purchase, Shipping Records  
Sales Contracts & Invoices 3 yrs
Requisition/Purchase Orders 3 yrs
Export Declaration & Manifests 4 yrs
Freights, Shipping, & Receiving Reports 4 yrs
Bills of Lading Records 4 yrs
III. Personnel Records  
Daily Time Reports 6 yrs
Withholding Tax Statements 6 yrs
Disability & Sick Benefits Records 6 yrs
Expired Contracts 6 yrs
Files of Terminated Personnel 6 yrs
IV. Corporate Records  
Expired Notes, Leases & Mortgages 6 yrs
All Cash Books 7 yrs
Contracts & Agreements Indefinitely
Property Deed & Easements Indefinitely
Registration of Copyrights and Trademarks Indefinitely
Patents Indefinitely
Corporate By-Laws and Minutes Books Indefinitely
Capital Stock & Bond Records Indefinitely
Stock Certificate & Transfer Lists Indefinitely
Canceled Checks on Asset Purchases Indefinitely
Canceled Checks for Taxes & Contracts 7 yrs
Proxies Indefinitely
Labor Contracts 7 yrs
Retirement & Pension Records 7 yrs
Tax Returns & All Work Papers 7 yrs
V. Insurance Records  
All Expired Policies 4 yrs
Accident Reports 6 yrs
Safety Reports 8 yrs
Settlement Claims 10 yrs
Group Disability Records 8 yrs
Fire Inspection Reports 6 yrs
VI. Correspondence  
General – All 3 yrs
Tax & Legal Communications 7 yrs
License & Traffic 6 yrs
Sale & Purchase 6 yrs
 

Personal Records

 

 
Tax Returns and Related 7 yrs
IRA Contribution Records Permanently
Retirement/Savings Plan Statements From 1 yr to permanently
Bank Records From 1 yr to permanently
Brokerage Statements Until you sell the securities
Bills From 1 yr to permanently
Credit Card Receipts & Statements From 45 days to 7 yrs (7 yrs for tax-related expenses)
Paycheck Stubs 1 yr
House/Condominium Records From 6 yrs to permanently
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Is Your Workplace Female-Friendly?

Attracting and retaining talent in your small business can be a giant step toward growing into a mid-sized business. Beyond attracting new employees with salary and benefits, here are several perks, policies, and benefits to consider when recruiting women, and employees in general, to your workforce.

1. Flex work hours.

Everyone likes regaining control over their workday, and offering flex hours can be one of the lowest cost policies to implement. Flex hours support work-life balance and are especially important for employees who have school-age children who can plan work around their children’s day.

2. Wellness initiatives.

Large companies are able to offer a wellness program, but small companies can take small steps to reach the same result. Find a local gym to partner with for a membership discount. Bring in the occasional yoga teacher. Or hire a nutritionist to speak once a quarter to your employees. All of these small initiatives demonstrate to your employees that you honor a culture of wellness.

3. Maternity and adoptive leave.

Do you have a policy about time off for new parents? And more importantly, you’ll need a process to re-integrate the employees into the business when they return.

4. Child care support.

Even if you can’t afford to provide onsite child care, you might be able to partner with a local child care facility to provide reduced or subsidized rates.

5. Gender hiring goals and metrics.

Do you have an equal number of men and women in your workplace? If not, do you have goals in place to adjust the ratios when possible? If you have a disproportionate number of one gender making all of the hiring decisions, you may want to consider the effects of implicit bias on your hiring processes.

6. Mentoring.

One way to speed the growth of employees is to provide mentoring. All employees will benefit from strong role models.

7. Opportunities for promotion.

Both men and women will perform better when there is a clear path to promotion as well as leaders in current positions who demonstrate leadership.

8. Dress for your day.

One of employees’ favorite perks is to be able to dress casually when no customer meetings are scheduled.

9. Paid time off.

Paid time off, which used to be called sick pay, is a favorite. But now, with most employers, you don’t necessarily have to be sick or explain your reason for wanting to take a personal day from work.

10. Gender-neutral company events.

Many companies create events for employees and sometimes customers to enjoy and mingle. This can include the company Christmas party, lunches, and happy hours. It can also include sports events such as golfing and attending baseball games. For every traditionally male event, be sure to plan a traditionally female event to keep the options gender equal. Spa day, anyone?

These benefits are a great start to attracting top talent, boosting employee morale, and maintaining a happier workforce in your business.

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Income Shifting: SAVE Thousands in Taxes

Want to save money in taxes WITHOUT working harder? One way is to shift income from a higher bracket taxpayer to a lower one or even a zero rate-bracket. Typically, splitting the income between family members by hiring them to work in the business will save thousands in taxes. An example is shifting income to your kids by hiring them. It is perfectly legal if done correctly, but if your children are unreasonably paid, the IRS will take notice. Let me give you an example of how this can work.

Jane owned a consulting business. She had two teenage sons that legitimately did work for the business. Some of the tasks they did included vacuuming the offices, emptying trash cans weekly, taking care of recycle and shredding documents, filing receipts, stuffing envelopes and doing yard work outside the office. Jane plans to pay her sons $5,000 each for the year. She was able to shift $10,000 from her higher tax rate to her son’s ZERO tax rate, which saved thousands.  She plans to use this $10,000 to teach her kids about budgeting.

Also, this income shift helped with her personal cash flow because she has the kids help pay for groceries and set aside the money for college. Another thing she plans to do is to put money aside in a Roth IRA for the kids. While the company will need to pay some payroll taxes, the savings far outweigh the cost. Another benefit is that her sons will learn basic knowledge of how she runs her business.  What a GREAT tax deduction for her business – and it was EASY!

Here are some facts and tips around income shifting:

  • Your kids can be any age
  • They need to keep a time card for work done – documentation is key
  • The work needs to be appropriate for the age and skill level
  • Depending on the situation, your child may not have to file a tax return
  • Consider helping parents or grandchildren who might be in lower income brackets

Depending on your business entity, you can also reduce self-employment taxes with this strategy. For corporations, it is a great way to reduce the taxable income. If you are a sole proprietor, there are some taxes the kids don’t have to pay in their paycheck. And, the IRS allows this, but they don’t volunteer the information to you.

Don’t get this strategy confused with gifting money to your child.  When gifting, there is no work involved.  Also, don’t get this shifting of income mixed up when parents move investment income (interest, dividends and capital gains) to their children.  That is called the “kiddie tax.”

Income shifting works well under specific situations, and not everyone can meet the requirements.  Depending on your situation, you may be able to take advantage of the income shifting opportunity, so feel free to reach out to us if you want to discuss your options.

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Five Tips to Make Tax Time Painless

Tax time is probably not your favorite time of year, especially if you have to pay the government your hard-earned dollars. Here are five tips on how we can make it just a bit less painful.

1. Have patience.

Practicing patience will go a long way when you’re dealing with taxes. Keep in mind that for tax professionals, the months of January through April are as crowded and hectic as a shopping mall in December. Parking is scarce, the sales clerks are doing the best they can, and customers are all trying to shop for presents, party items, and decorations in a very compressed time period.

Be patient with yourself as well. You have the skills to manage your business and do well at your career, but it may not be at organizing paperwork or dealing with numbers. That’s where we can help.

2. The tax stack.

Set aside a permanent place on your desk to be the tax stack. When you receive something in the mail that is tax-related, place it in the tax stack. You’ll save valuable time later not having to look for documents you need.

Similarly, create a folder on your computer for tax items. Under Documents, create a folder called Taxes. Within that folder, create a folder for the tax year, such as 2017 for the year just ended. Move all of your tax-related computer documents into that file.

At your leisure, scan in or take a cell phone picture of the paper documents in the tax stack and place the digital file in the Tax folder. Now you’ll have everything in one place and you’ll be so organized that your tax accountant will be surprised!

3. Catch up.

If your books or records are behind for 2017, get them caught up now to beat the rush. If you wait until the first week of April, you’ll probably need to file an extension. Keep in mind that an extension only grants a paperwork extension; it doesn’t delay any tax payments that are due. If you wait too late, you’ll have the stress of waiting until the last minute, the stress of paying estimated taxes, and the stress of waiting until your return is finally filed.

4. Early bird.

Connect with us or your tax professional early to agree on what services will be offered and to get your documents turned in as soon as you receive them. Getting your things in early will mean less waiting time for preparation and filing. Wouldn’t it be great to be able to say that you’re done with your taxes in February? Your stress will be less, and your energy can be redirected to new projects.

5. Avoid a large tax payment.

The worst thing about tax time might just be writing a big check, possibly with penalties, to the government in April. Instead, plan ahead and spread out your payments for next year by adjusting your payroll withholding or making quarterly estimated tax payments. Spreading your tax payment throughout the year will have you writing a smaller check, if any, in April.

Try these five tips for tax time, and you’ll have more energy for other, more important things in your business.

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Entertainment Deductions: Half the Fun?

Here are some basic rules you need to know to ensure that all your entertainment expenses are deductible:

  1. Do you have an ordinary and necessary business reason for the entertainment?
  2. Did you have a quiet business discussion before, during or after the event? No discussion, no deduction! You’ll need to explain why the entertainment would benefit your business in the future.
  3. The discussion must be conducted in a business setting that allows an active business discussion. This could be a restaurant, for example. If the main entertainment is done in a non-business setting such as a bar with loud music or a cocktail party, you must speak about business before or after the event in a business setting.
  4. Do you have proof? Keep documentation of who, what, where, why and how much. This documentation must be written within one week of the meeting.

Reasonable, Lavish, and Extravagant: So does the entertainment need to be reasonable? Can you get in trouble if the entertainment is lavish and extravagant? Actually, no. The only rule is that it is must be an ordinary and necessary expense. There are no parameters on how much you can or cannot spend. In fact, a self-employed business person spent over $60,000 on entertainment (rock concerts). His entertainment expense was disallowed – not because of the amount – but because he did not have documentation to support the deduction.

The IRS looks at how much business was generated as a result of the entertainment. There is no rule regarding the number of times you may entertain a potential client, but a wise business person would limit the frequency within reason. But then again, what is reasonable? Taking your spouse out on a date once a month would not qualify. However, you could consider taking your mother out if she is a potential client/customer who will buy services or products from you – nothing wrong with that!

50 percent vs. 100 percent Deductible: Almost all entertainment is deductible at 50 percent, meaning that if you spend $500, you receive only a $250 deduction. Here’s the good news – any entertainment that revolves around a sporting event is fully deductible; that includes any ticket or sports event, only if:

  • It is organized for the primary purpose of benefiting a 501(c)3 charity
  • It donates all the net proceeds to a 501(c)3 charity
  • It uses volunteers to put on the event

So a PGA tour event would be fully deductible because they donate the net proceeds to charity, but a ticket to a college or high school sports event does not qualify since that usually goes toward the coaches’ pay. Other events that may qualify for a 100 percent deduction are tennis, skeet shoots, ski tournaments and fishing tournaments, just to name a few.

Another thing to keep in mind is that generally, you will get a better deduction if you list an expense to a sporting event as a business deduction rather than a charitable donation. For the contribution to a charity, you can deduct only the amount that exceeds the benefit you received from the item (the value of the entertainment).

Additional fully deductible entertainment expenses are employee holiday parties, annual picnics or summer outings. For example, a service corporation rented a powerboat and was able to deduct 100 percent of the $41,000 expense since it did not discriminate between the owners and employees and it was deemed ordinary and necessary.

*Note: Create two accounts in your accounting system’s chart of accounts – one for 50 percent and the other for 100 percent deductible entertainment.

Be strategic: Plan a business meeting for a substantial amount of time (say two hours) and then go skiing. You cannot deduct your personal skiing with your family (unless your spouse is active in the business), but you can deduct the entertainment with people who you plan to do business with. After skiing, resume your meeting for another two hours and one minute.

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