Small business owners often stress over taxes because parting with one's hard-earned cash is never easy. It is even more daunting when money is tight. But boss, did you know that deductions can save you tons on your tax bills? Well, you can claim several deductions, and business meal expenses are one of them.
But things are not as uncomplicated as they sound. You may end up facing an IRS audit by going wrong with meal expense deductions. While just 1-2% of small businesses get audited yearly, the thought of an IRS audit is scary. Stress not, because you can save yourself the trouble by staying on the right side of the law.
If you want to claim deductions for meal expenses, navigate them wisely to make the most of them and prevent a red flag for the IRS. Let's share a few tips to help you navigate business meal expenses like a boss.
1. Keep Your Receipts Organized and Accessible
Even though it sounds like a no-brainer, you'd be surprised how many business owners fail to keep track of their receipts. You must follow the rule for every expense, and corporate meals are no exception.
After all, the IRS may have some questions, and records help you give them the answers. Besides being important for tax purposes, recording expenses keeps you from impulsive spending on business meals.
Experts recommend keeping a separate folder for your meal receipts to ensure accessibility. For the record, write the purpose of the meal on the receipt.
2. Keep it Reasonable
That's the coolest piece of advice you can get as a small business owner. Of course, you shouldn't go overboard with any expense as it may not go well with the tax authorities. They may consider the big bills and even disallow the deduction.
So stick with the basics and avoid extravagant meals or alcohol, no matter how fancy the client is. Remember that the objective is to conduct business instead of hosting a wild party, right?
3. Know What Qualifies and What Doesn't
Another factor you must absolutely consider is that you cannot just write off any meal as a business expense. Well, the IRS has specific guidelines for Business Meal Expenses to determine what qualifies and what doesn't.
Typically, you can claim deductions for clients or potential clients, but employee events are deductible only if they are for business purposes. Brush up on the rules for the current year because they may change over time.
Also, comply with them or you may end up owing bigger bills to the IRS.
4. Use a Separate Credit Card
Everyone knows that it's important to keep personal and business expenses separate for tax purposes. The rule applies to meal expenses, so remember to use a separate credit card to pay them.
It enables you to keep track of your expenses and separate personal and business spending down the line. You can go the extra mile by using a card that offers cashback or rewards.
5. Consider Alternatives
You need not entertain clients by buying lavish buffets at fancy restaurants. It's possible to impress them with simpler options, provided you are creative enough. Consider alternatives like team lunches and coffee meetings at your office.
Besides being more affordable, these options are more casual and favorable for building relationships.
6. Be Strategic
Do you splurge money on client dinners and employee parties without second thoughts? Well, don't expect the IRS to be too happy about it. Business meals aim to help you network and build relationships with the right people. So be strategic about whom you invite to such events.
You don't need to pile up the bills by inviting people who aren't potential clients or valuable clients. For example, invite a decision-maker from that company if you're trying to win a new client.
7. Set a meal expense policy
Setting up a meal expense policy for your small business can help you streamline the process of reimbursing or deducting expenses. You can use a Business Process Automation tool to set limits for the maximum amounts to be spent on a business meal.
Also, define who is authorized to approve expenses and what types of meals are eligible for reimbursement. A clear policy prevents confusion for employees and ensures compliance with IRS rules.
How often do you take your clients or employees for dinners and parties? The good thing is that you can claim a tax deduction for the expense. But do it wisely and legitimately to prevent tax hassles. Follow these tips and you are good to go!