As a follow-up to our November article, Rules for Meals and Entertainment, below are some best practices for recording and deducting meals and entertainment expenses.
In order to optimize deductions, a business should practice having separate general ledger accounts to categorize the different meal and entertainment expenses it incurs, as well as levels of deductibility. While not required, separating various scenarios for meals and entertainment is recommended. If a business were to keep consolidated accounts, it can cost the business the following:
- Time – in order to sort through the different expenses through the account detail, tax preparation will take longer and therefore cost the business more in tax preparation fees—and possibly headaches.
- Potential deductions – Since many very different scenarios call for 50%, 100%, and 0% deductions, failure to effectively separate all expenses by deductibility may result in losing potential deductions.
- Credibility – if a business were to be audited by the IRS, one of the first accounts auditors look at are meal and entertainment accounts. The credibility of the business’s ability to effectively and transparently present items may be cause for auditors to look at other areas of the business. Typically, if the deductibility of an activity is questionable, the expense is usually nondeductible.
After creating these accounts, it is also important to train the accounting staff in the business how to classify the different expenses into the appropriate accounts in order to help avoid errors. In addition to training, creating internal processes and guidelines for employees will also be helpful in reducing mistakes in creating disallowed expenses. As an added step, accounting staff should review the accounts on a quarterly basis to correct any classification errors. All staff authorized to incur such expenses should also be advised to provide proper documentation, as expenses that lack documentation generally will not be deductible.
If you have any questions about the best practices for recording and deducting meals and entertainment, contact the professional at Gilliam Bell Moser LLP