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With the holiday season upon us, many company employees are looking forward to being able to kick back and have some fun at the annual holiday party. Yet the savvy entrepreneur knows that once the holidays are over, tax season is right around the corner — and there are plenty of areas where a company can save when it comes to tax deductions around the holiday season.
Not only are holiday parties eligible for tax deduction, but also charitable donations and even some seasonal travel. However, it’s important to note that it’s not a tax write-off free-for-all at the end of the year; the IRS has strict guidelines in place to make sure these rules aren’t being taken advantage of. This means that if you’re throwing a huge bash or taking a first-class flight for year-end meetings with clients, you’d better have the documentation and proof to back everything up in the event of an audit.
Ready to start saving? Read on to find out some areas where business owners can find some clever tax deductions for the holiday season.
(Note that this blog post is for educational purposes only; you should consult with a professional to get the full details of what tax write-offs your business is eligible for!)
The holiday party
Whether or not your holiday party is completely tax deductible depends on two major points: the guest list, and the purpose of the party. A holiday party that’s attended by employees only (plus their families) is fully deductible. It gets murky when the party’s guest list includes anyone else, such as clients. In that case, the party needs to be directly business-related — so less play and more work.
Fox Business contributor Bonnie Lee points out that if you’re including business associates and customers at your holiday party, you’re going to need “a presentation, a reveal, a speech, something that smacks of ‘substantial business discussion’ in order to write it off.” Even then, you may not be able to get the full 100 percent tax deduction — you’ll only be able to take 50 percent of the entertainment expenses, depending on how many non-employee guests you have. It may be a safer bet to keep the guest list completely confined to employees and their families.
Whatever the case, you’ll need to keep plenty of documentation on hand if you end up being audited for the night’s proceedings. Make sure you’ve got a copy of the guest list, and that includes everyone who attended — this is vital for accurate tax expensing purposes, particularly if you have a mix of employees and clients or customers. It’s also smart to keep a record of the costs of food, drink and entertainment, plus any details on business discussions that may have occurred.
Lastly, be sure not to overreach — the IRS might be a bit dubious of you applying to write off your holiday expenses, depending on how large your company is. While it’s valid for a big company to have bigger expenses, a smaller company shouldn’t be looking to write off thousands of dollars — that’s practically asking for an audit.
You might be feeling extra charitable around the holidays, so it’s good to know that a portion of your donations or giving can be a tax write-off. But again, there’s a catch: it depends on what charity you’re donating to. It doesn’t have to be money — volunteer services also count, as do items (think Christmas toys for kids) — but you need to make sure you’re donating to an eligible charity, first.
An article at the U.S. Small Business Administration website goes into further detail about what qualifies as a tax-deductible charitable donation. There are still limitations on what you can write off — for example, you can’t deduct your volunteer service value, but you can deduct the supplies or expenses you needed to make it happen — so it’s vital that you check out the forms on the IRS website to see what qualifies. You’ll still need to ensure that your donation is paid in full by the end of the tax year.
Keep in mind, the IRS has a limit on the amount of tax-deductible charitable donations — 50 percent of your adjusted gross income. As always, it’s important to consult a professional accountant on what’s eligible here, so make an appointment with your CPA before you donate. Although charitable donations ought to be done out of the goodness of one’s heart and not as a transaction that can benefit your business, it’s smart to try and make the most out of something you were already planning to do.
You won’t be able to recoup the tax on your pleasure trip to Tahiti, but if your travel during the holidays is completely business related — like year-end meetings or planning for the next quarter — then you can write off 100 percent of your travel costs as tax deductions. This includes a multitude of expenses and not just the travel cost itself — think hotels and taxis, too.
Yet, as with the previous two sections, there are a few caveats to writing off your holiday travel, and they’re centered on how much is for personal reasons versus business. A Quickbooks blog post notes that you can only deduct the portion of your trip that’s strictly for business, so any side trips to visit friends or family are out. If you’re looking to maximize the amount of tax deductions from your seasonal travel, take a look at planning your trip around an annual meeting, visiting vendors or clients or attending a conference.
But no matter how much (or how little) work you’re getting done while on a seasonal business trip, always keep detailed records of your expenses and what your meetings were about. In the event of an audit, you’re going to need proof that you aren’t claiming more than you’re allowed. As with holiday parties, the more you claim on your taxes, the more the IRS is likely to look into your business — especially if your company is quite small.
Keep track of the details
If there’s one thing business owners can learn from holiday-season expenses and tax deductions, it’s that it never hurts to over-track and over-prepare your expense reports. Moreover, it can definitely be worth your while to do some more in-depth research on what you can claim on your taxes — you could be missing out on a huge boost to your tax return. But be sure to not go overboard and try to claim everything, because the IRS has regulations in place to keep you from maxing out your deductions. With any luck and some good bookkeeping, you and your company might just end up with a bit of extra cash to put towards next year’s festivities.
What holiday-season business expenses have you claimed as tax deductions? Did the deductions pay off for you? Tell us in the comments.