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 tree care or landscape-maintenance business in the pursuit of income, happy employees and content owners. Although much has been said and written about tax-deductible picnics and holiday parties, the tax rules allow deductions for many other enjoyable activities.
Entertainment may, in many cases, be considered a business necessity, but it also can be enjoyable. When a tree care professional or business owner entertains customers or potential customers, the costs can really add up, but they are usually tax deductible – despite the recently “reformed” tax laws.
New restrictive rules for business entertainment
The deduction for food and beverage costs was impacted by the Tax Cuts and Jobs Act (TCJA) passed in December 2017, which limited deductions for meal and entertainment expenses to only 50% of the amount actually spent. Fortunately, deductions for meal and entertainment expenses remain a viable option for every tree care business – but not for every individual.
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 if:
• the expenses qualify as meals or entertainment;
• the expenses bear the necessary relationship to the tree care business; and
• adequate records are maintained to substantiate the expense.
Qualifying as meal and entertainment expenses are activities considered to provide entertainment, amusement or recreation at places such as:
• social, athletic and sporting clubs;
• sporting events; or
• hunting, fishing and similar trips.
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% 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 or shareholder, as well as employees of a tree care 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 that travel expenses are tax-deductible if the trip was primarily business related, such as a meeting, trade show, convention or to meet 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 on to 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 auto, either a personal auto 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, consider taking the family along. A spouse’s and children’s expenses won’t be deductible unless they work for the 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, for 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. And while only your airfare 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 record keeping.
Every tree care professional 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” fringe benefits and are tax-deductible by the business.
Many tree care businesses frequently 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 person 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 that are intended for the personal use or benefit of an individual (such as the president or manager) or a small class of individuals are considered to have 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’ 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.
• Items costing $4 or less, that have the business’ name clearly and permanently imprinted on them and are one of a number of identical items widely distributed; and
• Signs, display racks or other promotional material to be used on the business premises of the recipient.
On the downside, employee-incentive awards are generally considered 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 tree care 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 tree care business still can 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 requires a higher level of substantiation than many other business expenses. A notable exception preserved by the TCJA allows a tree care business to deduct 100% 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 total attendees, 80%, 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% owner or any family member of a 10% 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 tree care business and not subject to the 50% limit on business meals, and can be ignored by the employee. It is, however, always a good idea to consult a tax advisor.