One of the most audited portions of a tax return by the IRS is the meals and entertainment deduction. In fact most people are afraid to even deduct meals at the risk of getting audited and having to pay that money back. However, meals are one of the easiest deductions to substantiate, so please, always deduct your business meals, just make sure you audit proof every meal, and here’s how.
For every business meal you must answer 5 simple questions. As long as you answer these questions you will “audit proof” this portion of your tax return. So here they are. . .
1. Who – Who did you have lunch with and what is the business relationship with the person you ate with. This could be as simple as “John Smith – Customer” – “Or Larry David – Vendor Sales Rep”
2. Where – This is easy enough, just put the name of the restaurant. This is usually written on the receipt anyway, so it’s almost a no brainer. The reason they want to see this is that the IRS wants to make sure you are at a location that is “conducive to business discussion.” Buying popcorn and a hot dog while you’re watching a movie does not qualify because you cannot reasonably have a business discussion in a movie theatre.
3. When – This is also usually written on the receipt but it can’t hurt to write it down again. Remember that if a meal is less that $75 the IRS doesn’t require you to keep a receipt. It makes things a little easier but if you choose not to keep a receipt for whatever reason, just write the date and time in your tax organizer and you are safe. What falls under this category also is the “prearranged appointment” clause. You can’t run into a business associate on your way out of the restaurant, ask him if he closed the Jones account, and then expect to be able to deduct the meal. You must have a prearranged appointment to discuss business.
4. Why – what was the business purpose of the meeting? This is the most important question to answer you must list the exact nature of the business meeting. I recommend writing a complete sentence for this. Simply stating “sales presentation” is ok but I would prefer to see you write, “I met with John Smith to try and recruit him into my MLM business by showing him the compensation plan.” The IRS requires you to have and document a clear business discussion in order for you to deduct your meal expenses.
5. How much – Once again, usually written on the receipt already for you but be sure to include tax and tip for the entire meal.
If you don’t have a tax planner(which I recommend you do, and keep with you at all times), I recommend writing all 5 of these answer on the back of the receipt and here’s why. There is one more regulation that most people forget. You must make these 5 notes in a “reasonable time frame” after the meal. The IRS doesn’t want you trying to go back from memory at the end of the year to document all of your meals. You need to do so within a reasonable time frame. My opinion would be to do it while you are filling out the tip (don’t forget to keep my free tip calculator with you get a copy here). Write the answer to the five questions and date it, that way you are 100% audit proof for that meal.
Then keep them all together. If at audit time, you pull out your file of all your meals, with receipts with the question answers written on the back in an organized, time ranked order, most likely the auditor will skip that portion of the audit altogether.
If you are one of those people who still struggles with figuring out how much to tip, you never have to worry about it again. Just download my free tip calculator and print it out. Its the size of a credit card so it will fit in your wallet. Keep it with you so you always know exactly how much to tip!
Believe it or not there are several advantages to the sole proprietorship other than it just being the cheapest form or business entity. Oftentimes people spend the money and go through the additional complications of setting up a corporation or LLC they haven’t weighed the benefits versus the costs associated with setting up a corporation.
The first thing you want to be sure of, is if you aren’t going to go through the expense of setting up your corporation correctly you might as well not do it at all. Most new business owners hear somewhere that they need to set up a corporation and then they look around for the absolute cheapest way to set up a corporation. However, as always, with corporation set up, you get what you pay for. If you cut corners in your setup, when it comes time to rely on the protection that a corporation is supposed to lend to you, you may not be able to hide behind your corporation because it wasn’t set up properly. So if this is you, you may want to save the expense altogether and use a sole proprietorship.
Essentially, the main reason you want to set up a corporation is if you will have some type of liability that you want to protect your personal assets from. If you will never have any real liabilities, you really don’t need a corporation. Save yourself the money and spend it on marketing to grow your business.
Another reason you may want a sole proprietorship is to take advantage of certain types of medical expense deductions. In this case, the owner of the sole proprietorship hires her husband as an employee and offers him medical coverage as a fully deductible business expense. The husband then adds his wife (the business owner) on his “employer provided” medical plan as a spouse. This is a way to make your medical expenses fully deductible that can only be accomplished through a sole proprietorship.
This can be a very extensive topic there are just too many variable to discuss fully but to make it easy for you for now, here are the people who may want to explore operating as a sole proprietorship. If any of the following apply to you, ask your tax or legal professional to validate the statements below based on your specific circumstances.
- You will not have any liability to speak of. Some network marketers will never have any real liability but, make sure. You want to fully explore your exposure as a business operator especially in today’s litigious society.
- You will never have any non-family employees.
- You will not have any substantial assets owned by the entity. I knew a free lance writer who operated as a sole proprietorship. He never had any employees, no real liabilities and therefore he thought a sole proprietorship would be a sufficient business entity, which it was until he had an article series that a publisher wanted to option as service manual. At that point his body of work became a substantial asset at which time he decided to set up a corporation and place his intellectual property into the corporation.
In simplistic terms, rarely should anyone operate as a sole proprietorship. However, don’t waste the money on a corporation if you aren’t going to build a substantial business. I’ve seen too many people refuse to start their business until all the corporation paperwork was in place and 100% legal. The problem was after spending all that money, they never did anything with the business anyway and it was a waste.
I call this the business card syndrome. Most people refuse to do anything in business until their business cards and brochures are ready. Let me give you some advice. If a business card is keeping you from moving forward in your business just stop, you don’t have what it takes to run a business. If you let something as minor as being afraid to tell a prospect “sorry I don’t have any business cards with me” keep you from starting your business, you will never make it through the real challenges when they occur, and believe me they will.
However that is a topic of discussion for another time. For now, remember the three reasons for using a sole proprietorship entity and if you don’t qualify for any of those
Are you using the correct corporate structure for your business? Did you know that there are some cases where a sole proprietorship is actually the best way to go? If you haven’t thought about this it is imperative that you research this extremely important topic before you start your business. I recommend going to http://www.sandybotkin.com and getting some information before proceeding. Remember to use my coupon code to save an additional 10% off the already low prices.
Just because you got your W2 in the mail doesn’t mean you should run out and do your taxes at the closest tax shop. You might be surprised at how much a qualified CPA can save you not only on this years taxes but previous years and more importantly FUTURE years! Seek the advice of a qualified CPA before doing your taxes.
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Most people believe that if they make money from a hobby, they can only deduct expenses up to the amount of money they receive as revenue. Therefore, they don’t really keep track of expenses and revenues for that matter especially if they receive most of their monies as cash. This could be a mistake if you are actually running a legitimate business. In fact, only a few minor qualifications separate hobby income from a bona fide business but the difference in tax savings is immense.
For example, if you have a hobby making turquoise jewelry and sell it via your friends jewelry store and you make $1,500 to $2,000 a year in revenue, you might think that it’s not worth it to keep track of expenses. However, say that over the summer you take a trip to Arizona and while you are there you look at some Indian jewelry and buy a few items to use in your business. Well that entire trip now becomes tax deductible. The flight, lodging, gas, car rental, dry cleaning, some meals, some entertainment can all be legally itemized as a legitimate, legal, IRS approved business expense. You could easily rack up an additional $2,000 in business deductions just from one trip to Phoenix! Can you imagine if you did this all year long?
If you had $10,000 in business deductions, you could deduct that amount from you or your spouse’s taxable income and that could save you up to $3500 at the end of the year. Would that make it worth it to make a few minor changes in the way you manage your “hobby?” You bet it would. Don’t make the mistake of assuming Hobby Income is not a Legitimate Business. Consult a qualified CPA who specializes in small businesses to find out the specific steps you have to take to run your hobby as a business.
For more information I recommend as a starting point you buy this book “Lower Your Taxes” by Sandy Botkin. (Click on the pic below) Yes you should always consult with your own CPA, but this book makes a great starting point. The more you learn on your own ahead of time will save you time (= money) when you are sitting in front of your CPA. You may not want to pay his hourly rate to explain basic tax knowledge when you can learn the basics on your own.