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BUSINESS TRAVEL, ENTERTAINMENT, AND GIFTS - AIPB

S ection 8. B U S IN ES S travel , EN TERTAIN MEN T, AN D GIF TS. In trod u ction In gen era l, a n S corpora tion ma y dedu ct its ordin a ry a n d n ecessa ry expen ses for bu sin ess t r a vel, en t er t a in m en t , a n d gift s. Tr a vel expen ses in clu de t h e cost of t r a n spor t a t ion , lodgin g, m ea ls, a n d in ciden t a ls su ch a s t eleph on e, la u n dr y, a n d t ips. To cla im t h e dedu ct ion , t h e cor por a t ion m u st m a in t a in det a iled r ecor ds docu m en t in g t h e n a t u r e a n d a m ou n t of t h ese expen ses. Th e dedu ct ion is cla im ed on pa ge 1 of F or m 1120S, lin e 19 a s Ot h er dedu ct ion s.. Th is sect ion det a ils h ow t o r epor t a n d docu m en t t h e expen ses. T h e A ccou n table Plan for R eim bu rsem en t of E m ployee B u sin ess E xpen ses Tr a vel a n d en t er t a in m en t expen ses m a y be pa id by cor por a t e cr edit ca r d, in wh ich ca se t h ey a r e ch a r ged dir ect ly t o t h e cor por a t ion.

Section 8 BUSINESS TRAVEL, ENTERTAINMENT, AND GIFTS Introduction In general, an S corporation may deduct its ordinary and necessary expenses for business travel, entertainment, and gifts.

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Transcription of BUSINESS TRAVEL, ENTERTAINMENT, AND GIFTS - AIPB

1 S ection 8. B U S IN ES S travel , EN TERTAIN MEN T, AN D GIF TS. In trod u ction In gen era l, a n S corpora tion ma y dedu ct its ordin a ry a n d n ecessa ry expen ses for bu sin ess t r a vel, en t er t a in m en t , a n d gift s. Tr a vel expen ses in clu de t h e cost of t r a n spor t a t ion , lodgin g, m ea ls, a n d in ciden t a ls su ch a s t eleph on e, la u n dr y, a n d t ips. To cla im t h e dedu ct ion , t h e cor por a t ion m u st m a in t a in det a iled r ecor ds docu m en t in g t h e n a t u r e a n d a m ou n t of t h ese expen ses. Th e dedu ct ion is cla im ed on pa ge 1 of F or m 1120S, lin e 19 a s Ot h er dedu ct ion s.. Th is sect ion det a ils h ow t o r epor t a n d docu m en t t h e expen ses. T h e A ccou n table Plan for R eim bu rsem en t of E m ployee B u sin ess E xpen ses Tr a vel a n d en t er t a in m en t expen ses m a y be pa id by cor por a t e cr edit ca r d, in wh ich ca se t h ey a r e ch a r ged dir ect ly t o t h e cor por a t ion.

2 Alt er n a t ively, t h e expen ses m a y be pa id by t h e em ployees, wh o a r e su bsequ en t ly r eim bu r sed by t h e cor por a t ion . In bot h of t h ese ca ses, m ost cor por a t ion s a dopt a n a ccou n t a ble pla n , wh ich r equ ir es t h e followin g: 1. t h e em ployee m u st pa y or in cu r dedu ct ible expen ses wh ile per for m - in g ser vices a s a cor por a t e em ployee;. 2. t h e em ployee m u st a dequ a t ely a ccou n t for t h ese expen ses t o t h e cor por a t ion wit h in a r ea son a ble per iod of t im e; a n d 3. t h e em ployee m u st r et u r n t o t h e cor por a t ion a n y excess r eim bu r se- m en t s. To a dequ a t ely a ccou n t for t r a vel a n d en t er t a in m en t expen ses, t h e em ployee m u st pr ovide wr it t en docu m en t a t ion t h a t a n swer s t h e followin g qu est ion s: wh en , wh er e, a n d wh y wa s t h e expen se in cu r r ed.

3 H ow m u ch wa s spen t ;. a n d in t h e ca se of en t er t a in m en t , wh a t wa s t h e bu sin ess r ela t ion - sh ip of t h e in dividu a ls bein g en t er t a in ed. 181. Mastering Tax Preparation for S Corporations In a ddition , th e employee mu st provide receipts for lodgin g expen ses. Receipts for ot h er expen ses, su ch a s m ea ls a n d en t er t a in m en t , a r e r equ ir ed on ly if th e expen se equ a ls or exceeds a n a mou n t esta blish ed by th e IRS. For expen ses ot h er t h a n lodgin g in cu r r ed a ft er Sept em ber 30, 1995, t h e a m ou n t is $75. 1. To sa t isfy t h ese docu m en t a t ion r equ ir em en t s, m ost S cor por a t ion s h a ve em ployees pr epa r e for m a l t r ip r epor t s, expen se r epor t s, or m ilea ge logs or dia r ies det a ilin g t h e t ype a n d a m ou n t of bu sin ess t r a vel a n d en t er t a in m en t expen se.

4 Figu re 8-1, excerpted from IRS Pu blica tion No. 463, T ravel, En tertain m en t, gift , & Ca r E xpen ses, in dica t es t h e in for m a t ion t h a t is r equ ir ed t o a dequ a t ely a ccou n t for bu sin ess t r a vel, en t er t a in m en t , gift , a n d a u t om obile expen ses. FIGURE 8-1. Elements to Prove Certain BUSINESS Expenses Element Expense to be proved travel entertainment gift Transportation (1) (2) (3) (4) (5). Amount Amount of each separate Amount of each separate expense. Incidental Cost of gift . (1) Amount of each expense for travel , lodging, expenses such as taxis, telephones, etc., may separate expense, and meals. Incidental be totaled on a daily basis. including cost of the expenses may be totaled in car;. reasonable categories, (2) Mileage for each such as taxis, daily meals BUSINESS use of the for traveler, etc. car; and (3) Total miles for the tax year.

5 Time Date you left and returned Date of entertainment or use of a facility for Date of gift . Date of the expense for each trip, and number of entertainment . For meals or entertainment or use. days for BUSINESS . directly before or after a BUSINESS discussion, the date and duration of the BUSINESS discussion. Place Name of city or other Name and address or location of place of Not applicable. Name of city or designation. entertainment , or place of use of a facility for other designation if entertainment . Type of entertainment if not applicable. otherwise apparent. Place where BUSINESS discussion was held if entertainment is directly before or after a BUSINESS discussion. Description Not applicable. Not applicable. Description of gift . Not applicable. BUSINESS BUSINESS reason for travel BUSINESS reason or the BUSINESS benefit BUSINESS reason for BUSINESS reason for Purpose or the BUSINESS benefit gained or expected to be gained.

6 Nature of giving the gift or the the expense or use gained or expected to be BUSINESS discussion or activity. BUSINESS benefit of the car. gained. gained or expected to be gained. BUSINESS Not applicable. Occupations or other information such as Occupation or other Not applicable. Relationship names or other designations about persons information such entertained that shows their BUSINESS as name or other relationship to you. If all people entertained did designation about not take part in BUSINESS discussion, identify recipient that shows those who did. You must also prove that you or his or her BUSINESS your employee was present if entertainment relationship to you. was a BUSINESS meal. 182. BUSINESS travel , entertainment , and GIFTS If a n S cor por a t ion r eim bu r ses em ployees pu r su a n t t o a n a ccou n t a ble pla n , it is per m it t ed t o dedu ct t h e r eim bu r sem en t s a s bu sin ess t r a vel a n d en t er t a in m en t expen se, su bject t o cer t a in lim it a t ion s discu ssed below.

7 Th e em ployees a r e n ot r equ ir ed t o in clu de t h e r eim bu r sem en t s in t h eir t a xa ble com pen sa t ion . Th e cor por a t ion keeps t h e em ployees' a ccou n t in gs (su ch a s t h e expen se r epor t s) a s docu m en t a t ion of it s dedu ct ible expen ses. EXAMP LE 1: Tr u cker Cor por a t ion r eim bu r ses it s em ployees for bu sin ess t r a vel a n d en t er t a in m en t expen ses u sin g a n a ccou n t a ble pla n . Th e em ployees pa y t h e expen ses, su bm it expen se r epor t s sa t isfyin g t h e IRS docu m en t a t ion r equ ir em en t s t o t h e cor por a t ion 's pa yr oll office, a n d a r e r eim bu r sed. Du r in g t h e yea r , t h e cor por a t ion r eim bu r sed it s em ployees for t h e followin g expen ses: Air fa r e a ct u a l $2,200. Lodgin g a ct u a l 2,600. Ren t a l ca r s a ct u a l 500. Ta xi fa r es a ct u a l 150. Tot a l* $5,450.

8 *Mea ls a r e in t en t ion a lly exclu ded fr om t h is exa m ple a n d will be cover ed below. Th e cor por a t ion ca n dedu ct t h e $5,450 a s bu sin ess t r a vel expen se. Th e dedu ct ion is cla im ed on pa ge 1 of F or m 1120S, lin e 19, Ot h er dedu ct ion s. Th e em ployees a r e n ot r equ ir ed t o r epor t t h e r eim bu r sem en t s a s t a xa ble com pen sa t ion . Li m i t a t i on for m ea l s a n d en t er t a i n m en t In gen er a l, a n S cor por a t ion m a y dedu ct 50% of it s bu sin ess m ea l a n d en t er t a in m en t expen ses. EXAMP LE 2: Ma gn a Cor por a t ion r eim bu r sed it s em ployees for t h e followin g bu sin ess t r a vel a n d en t er t a in m en t expen ses u sin g a n a ccou n t a ble pla n : Air fa r e a ct u a l $ 500. Lodgin g a ct u a l 900. Mea ls a ct u a l 300. E n t er t a in m en t a ct u a l 400. Tot a l $2,100. 183. Mastering Tax Preparation for S Corporations The corporation may deduct $1,750 of BUSINESS travel and entertainment expen ses, con sist in g of t h e $500 of a ir fa r e, $900 of lodgin g, $150.

9 ( x $500) of m ea ls a n d $200 ( x $400) of en t er t a in m en t . Th e $2,100 of r eim bu r sem en t s a r e n on t a xa ble in com e t o t h e em ployees. D ed u ct i b i l i t y of en t er t a i n m en t a ct i v i t i es E n t er t a in m en t in clu des vir t u a lly a n y socia l or en joya ble a ct ivit y, su ch a s in -t own bu sin ess m ea ls wit h clien t s a n d cu st om er s, en t er t a in in g gu est s a t cockt a il lou n ges, spor t in g even t s, n igh t clu bs, t h ea t r e a n d m u sica l even t s, a n d a n a ft er n oon of golf or t en n is a t t h e loca l clu b. To be dedu ct ible, t h e en t er t a in m en t m u st eit h er be dir ect ly r ela t ed t o or a ssocia t ed wit h t h e cor por a t ion 's bu sin ess, defin ed a s follows: If t h e pr im a r y pu r pose of a n en t er t a in m en t a ct ivit y is t h e a ct ive con du ct of bu sin ess a n d, in fa ct , a bu sin ess discu ssion , t r a n sa ct ion , n egot ia t ion , et c.

10 , t a kes pla ce du r in g t h e a ct ivit y, t h en t h e en t er t a in m en t is dir ect ly r ela t ed t o t h e cor por a t ion 's bu sin ess. If a n en t er t a in m en t a ct ivit y fa ils t o m eet t h e dir ect ly r ela t ed t o t est , bu t a su bst a n t ia l bu sin ess discu ssion , n egot ia t ion , t r a n sa ct ion , et c., t a kes pla ce on t h e sa m e da y a s t h e a ct ivit y, t h e en t er t a in m en t is a ssocia t ed wit h t h e cor por a t ion 's bu sin ess. EXAMP LE 3: Accou n t a n t s, In c. per for m s sm a ll bu sin ess a ccou n t in g a n d t a x ser vices. On F r ida y m or n in g, em ployee J oe m et wit h a clien t t o discu ss yea r -en d t a x pla n n in g. La t er t h a t da y, J oe pa id for a golf ga m e wit h t h e clien t a t t h e cou n t r y clu b. Beca u se t h e golf m a t ch t ook pla ce on t h e sa m e da y a s a sign ifica n t bu sin ess discu ssion , it sa t isfied t h e a ssocia t ed wit h r equ ir em en t for t h e dedu ct ibilit y of bu sin ess en t er t a in m en t.