With the year-end fast approaching, it’s time to start thinking about how your business can maximize its tax deductions. The good news is that the holiday season brings with it a variety of deductible expenses that can help you reduce your taxable income before the end of the year. Here are just a few:
Write Off Your Holiday Party
Holiday parties for employees are fully deductible. You can even invite spouses and still claim the full deduction.
However, be careful about inviting clients. Once you extend your invite list outside the company, then technically your party falls into the IRS meals and entertainment tax rule. If you host a party for employees and clients, you can still deduct 100% of the costs attributed to employees, but you can only deduct 50% of those attributable to clients. Furthermore, you’ll have to prove that the event had a business purpose (the same rule applies if you invite partners or independent contractors).
To achieve the best tax deductions, stick to only inviting employees and their spouses—and be sensible. Any “lavish or extravagant” expenses will catch the eye of the IRS. Assign a reasonable cost-per-head and make sure the event isn’t the biggest deduction you take this year. Finally, keep good records (when, where, who attended, any business discussions/purpose) and documentation to back up your claims.
Treat Your Clients to a Holiday Lunch
As mentioned above, client entertainment, such as holiday lunches, are deducted at a rate of 50% of the actual cost. In addition, the occasion must involve active discussion about business, such as plans for next year, new product releases, etc. Don’t forget you can also deduct the cost of mileage to and from the restaurant. As usual, keep good records.
Buy Holiday Gifts—But Don’t Go Crazy
Giving your employees or top clients a holiday gift is common practice. While it can produce tax savings, especially if you have a lot of clients, be warned the deduction limit is $25 per recipient during the tax year. If you’re looking to maximize your tax deductions, it pays not to spend more than this amount on each person. Also remember, the rule applies to the tax year. If you already bought that person a gift during the year and deducted the full $25 annual limit, you can’t deduct any further expenses for that recipient until the new tax year.
In addition, if that gift is food, such as chocolate or cookies, it should be treated as a gift, and not as an “entertainment” deduction. Read more from the IRS on “Gifts” deduction.
Give Back, Take Some Tax Deductions
Philanthropy is on the rise among small businesses. A survey from Alignable, a social network for small businesses, found that 95% of small business owners have charitable giving plans. Giving back during the season of giving also makes great business sense. It’s a worthy branding exercise, great for employee morale, and, of course, there are tax deduction benefits. The IRS has some strict rules on this though. Here’s what you need to know:
The IRS limit on giving is 50% of your gross adjusted income. The amount you actually save on your taxable income varies depending on your tax bracket.
As long as you don’t set cash aside for a specific person but to a qualified organization (501(c)(3) nonprofit groups), these donations are deductible.
Donations of property, such as vehicles and business inventory, are deductible and evaluated by the IRS based on their fair market value.
While you can’t deduct the value of any volunteered service or labor, you can deduct any costs associated with that work, such as the costs of hosting a fundraising party, buying supplies, or uniform expenses.
Receipts, credit card statements, etc. For donations over $250, you’ll need a written acknowledgement from the charity or nonprofit that meets IRS guidelines.
Read more from CharityNavigator.org.
…whatever tax deduction you take, don’t overstate your expenses or spend more than is reasonable for your business size and industry. Remember, a tax deduction for you is a loss for the IRS, and they’ll scrutinize anything that looks atypical or inflated.
This post is purely educational and doesn’t constitute tax advice. Please consult a tax professional.