Tax and financial advice from the Silicon Valley expert.

What meals, entertainment and business gifts are 100% deductible?

The deductibility for meals, entertainment and business gifts is a complex area of the federal tax laws that is worth studying.  I am going to highlight some areas where these items are 100% deductible to stimulate further conversation with your tax advisor.  This is not a complete explanation that you can rely on as authority for a tax position.

The basic rule is that certain business meals and entertainment are 50% deductible.  Business gifts are deductible up to $25 to a person (spouses are counted as one person) per year.

There are important exceptions that should be separately accounted for on a business’s books and records.

For example, food and beverages provided on the business premises of the employer for the convenience of the employer as a de minimus fringe benefit are 100% tax deductible.  This is the “company cafeteria” exception.

Recreational or social expenses primarily for the benefit of employees other than highly compensated employees, such as company picnics and holiday parties, are 100% tax deductible.

When a taxpayer is in the business of providing meals and entertainment to customers, such as amusement parks, restaurants and nightclubs, the expenses of providing those goods and services are 100% tax deductible.

An important exception that I want to focus on is expenses for goods, services and facilities made available by the taxpayer to the general public.  This article was inspired by private IRS letter ruling 9641005, which explains how the limitations apply for a casino.  IRS private letter rulings can’t be relied on as authority for tax positions, but indicate the thinking of the IRS for this situation.

In that ruling, the term “general public” is very broadly interpreted to include a customer or group of customers.  (It may be that casinos as a group have enough political “pull” to get a generous interpretation by the IRS.)

Most of the gaming operations, shows, and restaurant facilities in the casino are providing meals, entertainment and lodging to the general public, and so the expenses of providing them are tax deductible as cost of goods and services sold.

Casinos provide a number of gifts to customers intended to stimulate additional business, called “comps.”

When a casino provides food, drinks and show tickets on its premises as comps to guests who are gambling or lodging on the premises, they are providing tax deductible “samples” to the public, which are 100% tax deductible.

Some promotional gifts given to customers may be fully tax deductible.  An example from the Congressional Committee report is cited that if the owner of a hardware store advertises that tickets to a baseball game will be provided to the first 50 people who visit the store on a particular date, or who purchase an item from the store during a sale (gift with purchase), the total cost of the tickets is tax deductible as a business promotion expense.  Casinos commonly give coupon books to their guests and may deduct 100% of the expenses for the coupon items.

Items, such as promotional pens, that cost up to $4.00 with the taxpayer’s name imprinted for which multiple identical items are given are not considered to be business gifts, but simply fully tax-deductible promotional items.

Dinner meetings for groups of customers or prospective customers relating to a business presentation, as we commonly see for financial planners, are 100% tax deductible “public events.”

Things become more involved for comps provided by casinos for activities off their business premises.

For example, sporting event tickets (unless relating to a business promotion) are only deductible for their face value, and may be either deducted as entertainment expenses subject to the 50% limit or as gifts subject to the $25 annual limit per customer.

Meals or other entertainment provided off the premises might be 50% deductible if a representative of the casino accompanies the customer for a business deduction.  Otherwise, reimbursements provided to the customer or direct payment by the casino aren’t tax deductible.

Some business expenses that would otherwise be entertainment are classified differently in certain situations.  For example, professional theater critics may fully deduct theater tickets for shows they review, and fashion shows by clothing manufacturers are fully deductible promotional events.

Note the $25 and $4 limitations above are very old, going back to 1954.  This is a good time to write your representatives in Congress that these limitations should be increased or eliminated.

Now is a great time to review your accounting procedures with your tax advisor to assure you are maximizing your tax deductions.  If you need our assistance in that effort, please call Dawn Siemer at 408-918-3162 weekday mornings to make an appointment.

A Social Security benefit when both spouses were at least age 62 on 1/1/2016

Under a grandfather rule, married couples who were both at least age 62 on January 1, 2016 are eligible for a procedure called a “restricted application” to increase their Social Security benefits.  The spouses must also meet other qualifications for spousal benefits to use the procedure, which I’m not going to explain here.

The Social Security benefit increases by 8% each year after the individual reaches “full retirement age” until reaching age 70, usually for a total potential 32% increase.  (For individuals born from 1945 to 1954, full retirement age is age 66.)

If you are trying to provide the highest possible survivor benefit, you will usually want to defer applying for benefits for the higher-earning spouse until age 70.

Lower-earning spouses can always apply for worker benefits under their own account and later apply for potentially higher spousal benefits after their higher-earning spouses apply for benefits under their own account.

When a restricted application is made, the higher-earning spouse initially applies only for spousal benefits under the lower-earning spouse’s account.  Retirement credits continue to accrue on the higher-earning spouse’s account and that spouse applies for worker benefits on his or her own account at age 70.

For example, John was born on April 8, 1953.  His full retirement age benefit at age 66 is $2,500 per month.  Jill was born on December 30, 1952.  Her full retirement age benefit at age 66 is $800 per month.

Jill applies for worker benefits at age 66 on December 30, 2018.  Her benefit is $800 per month.

John makes a restricted application for spousal benefits at age 66 on April 8, 2019, for a benefit of $400 per month (disregarding cost of living adjustments for all computations.)

John applies for worker benefits on his own account at age 70 on April 8, 2023, for a benefit of $3,300 per month.

Jill applies for spousal benefits during April 2023 for a benefit of $1,250 per month (one-half of John’s primary insurance amount of $2,500).

You can’t apply for spousal benefits until your spouse applies for worker benefits.

When the low-income spouse applies for spousal benefits after reaching full retirement age, that spouse receives one-half of the high-income spouse’s primary insurance amount (the worker benefit that spouse would receive at full retirement age without any increases for deferred retirement credits), even if the high-income spouse hasn’t reached full retirement age, and even when the high-income spouse applies for benefits later than full retirement age.

This explanation only covers the highlights.  You might want to go over your details with a financial planner who understands Social Security benefit planning.

Also, be extra careful when making a restricted application for benefits to avoid accidentally making a regular application.

I hope this information is helpful for you or somebody that you know.  Feel free to share a link for this blog post.

Tax and financial advice from the Silicon Valley expert.