Welcome back. In this video we'll look at what

business related entertainment expenses and home office expenses are,

and how they're treated for tax purposes if the person is an employee or self-employed.

Let's start with entertainment expenses.

So let's say you have an important client and you

take the client out to dinner, and to a show.

You discuss business, but you also engage in

activities that have a large element of personal pleasure.

Is this really a business related expense?

Is it deductible? And if it is,

wouldn't it be great to go to the finest restaurants and see the best shows with

our clients and get a nice big deduction for it since it's business related.

Well the IRS is worried about how lavish meals and entertainment can be.

So they highly restrict the deductability of

these activities despite them being business related.

Here the general rule is that

only 50% of the cost of meals and entertainment is deductible.

So right away the IRS is only letting you deduct half the cost.

What's included here are the costs of the meals, entertainment,

related taxes like sales taxes, tips, cover charges,

parking fees and room rental fees for the meal or entertainment.

However 100% of the transportation costs

related to the meal or entertainment is deductible.

It is important however that the meal or entertainment is not lavish or extravagant.

It must be reasonable.

Assuming the meal or entertainment is not lavish,

then the related costs are deductible if the meal or entertainment is

directly related to business or associated with business.

Direct relation means that there is

an actual business meeting or discussion during the meal or entertainment.

Associated means that the meal or entertainment is

right before or right after a business meeting or discussion.

That is for the meal or entertainment to be deductible,

business must be discussed before,

during or after the meal or entertainment.

Finally the tax payer or an agent like

an employee must be present at the meal or entertainment.

For example a self-employed person can't just give a client

his credit card and say go have fun and still get the deduction.

The self-employed person, if he's paying for it,

and wants to claim the deduction,

must be present at the meal or entertainment event.

There are some other items and restrictions here related to meals and entertainment.

First, dues to country clubs or social clubs are not deductible.

There are some exceptions here.

If the club is formed for public service or volunteerism.

However, entertainment expenses at the club would

still be eligible for the 50 percent deduction.

Contrast this with professional dues,

that is dues paid to a trade or business organization which is 100% deductible,

unless a part of that due is related to federal lobbying,

which we learned about in a previous video.

Regarding ticket purchases for entertainment,

only the face value is deductible.

Amounts paid above the face value of the tickets for example,

amounts paid to a scalper or to a ticket broker are not deductible.

If you purchase luxury tickets linked to a skybox,

then the costs are 50% deductible up to the highest priced non luxury box seat.

Again as with many of the previous expenses,

if the expenses are incurred by a self-employed person,

then the deduction is for AGI.

But if the expenses incurred by an employee and not reimbursed by the employer,

the available deduction is from AGI,

and deductible only to the extent it exceeds 2% of the taxpayers AGI.

Now let's turn to expenses related to having an office in the home.

This is another very highly abused area of deductions.

So the IRS has very restrictive rules about what is deductible and how much.

In fact this area is a very high audit risk for

taxpayers who claim the home office deduction.

So it's important to be careful here.

In general, for the cost of a home office to be deductible,

the office must be used exclusively and on

a regular basis as a principal place of business or place of business used by customers.

When we're looking at employees in particular,

the Home Office must be for the convenience of the employer not the employee.

This could happen for example if an employer does

not want to maintain an entire office in a town.

So the employer requires its employees in that town to work from home.

Therefore if you have a main office available outside the home,

you will not be eligible for the home office deduction.

Even if you end up working from home out of your own convenience.

So to put a finer point on this requirement,

a principal place of business is where a taxpayer

conducts administrative and management activities,

and there is no other fixed location where the taxpayer conducts the activity.

So again, if your employer does not have an office in a town,

and so it requires its employees to work from home,

the employees likely do all of their administrative work at home.

Answer emails, make phone calls,

make copies and so on.

So how was the home office deduction calculated?

Here, just like hobbies,

the most in home office expenses that can be deducted is

how much income is generated in the home office based business activity.

Specifically the taxpayer has to take gross income from the business activity,

and subtract out regular direct expenses.

For example, marketing supplies,

insurance and so on.

If the net income is positive,

then the taxpayer would be eligible for the home office deduction,

but can only deduct as much as there is in net income left.

If the home office expenses exceed the net business income,

then these disallowed losses are carried forward

indefinitely and can be deducted in future years.

So the sequence here is gross income,

minus direct non-home office that is operating expenses.

Then, the taxpayer can deduct home office expenses in

the three tiers as we saw with hobbies and mixed personal and rental use properties.

That is Tier one expenses are expenses related to the home that would

otherwise be deductible even if the home office wasn't there.

For example property taxes and home mortgage interest.

Tier two relates to home office related operating expenses.

For example utilities, telephones,

security, lawn care, home maintenance and insurance.

Then, Tier three relates to depreciation taken on the Home Office portion of the home.

Importantly the tiers are deductible using the rate derived as

a square footage of the Home Office divided by the square footage of the entire home.

So if 20% of your home is being used by the Home Office,

then 20% of your home mortgage interest,

property taxes, home maintenance,

heating utilities et cetera,

would be deductible as a home office expense.

If the individual is self-employed,

then the Home Office expense will be deductible for AGI.

The nice thing that happens here for the self-employed individual,

is that he or she can convert otherwise from

AGI deductions in tier one or otherwise non-deductible

personal expenses that are in tiers

two and three into four AGI deductions because they are now business related.

Furthermore, any Tier one expenses that are not allocated to

the Home Office can still be deductible as regular from AGI deductions,

and they are not subject to the 2% floor.

If the individual is an employee,

all of Tier one is fully allowable as a From AGI deduction,

if the tax payer itemizes.

While Tiers two and three expenses are from AGI deductions,

subject to the 2% AGI floor.

So the employee treatment is considerably

less generous than for the self employed individual.

To recap, we examined two rather highly abused and risky deductions.

Meals and entertainment, and the Home Office.

Meals and entertainment are only half deductible,

while the home office deduction is severely restricted for employees.

Although more generous for self-employed individuals.

Entertainment and Home Office Expenses

Federal Taxation I: Individuals, Employees, and Sole Proprietors

Conheça os instrutores