5 MIN READ
As we begin to slowly emerge from the pandemic, business owners and clients alike will need time to re-adjust. There is a mutual sense of urgency to return to normalcy and recover from the long and difficult period that we have all experienced. The professional world may never be the same; rebounding and finding a sustainable long-term action plan will be no easy task.
We have become accustomed to technology that was once thought to be impossible, and pursuing business outside of your home or office may seem like a thing of the past. That being said, travel and networking are necessary elements that develop your business. Your value to your clients relies heavily on networking, word-of-mouth, and relationship building. As states begin to relax distancing restrictions and you become acclimated to the post-covid world, here are some tax considerations you need to be mindful of.
A significant tax update will be in effect for 2021 and 2022 regarding business meals. Businesses can fully deduct business meals that would typically be considered 50% deductible. The intent of this update is to stimulate the economy through increased spending at small businesses. With all nature of business meals presenting a 100% deduction, taking advantage of this development is a cost-effective method of engaging with current and potential clients and employees.
It is important to note that the IRS defines business meals as “meals with clients or prospects over which substantial business discussion takes place and employee meals while traveling on business.” The IRS is also dictating that these meals must not be lavish or extravagant. For example, discussing business over a meal with a client at a lunch restaurant is not extravagant. However, treating them to a five-course meal and drinks at a fancy restaurant may be considered lavish and extravagant. Use your best judgment, and keep your business meals professional and sensible.
To qualify and substantiate meal deductions, keep records of the amount of each expense, the date and location of the meal, and the business relationship of the person with whom you dined. When recording business-related meal expenses, continue separating them into more descriptive subcategories. Having client meals, employee meals, and travel meals be distinct from one another is best practice, regardless of what the IRS determines in the short term. Don’t let this update affect the way you handle your bookkeeping. This tax update will inevitably become phased out, and having consistency in your categorizations is the most optimal system. Separating meals into subcategories can be used for comparative purposes, benchmarking, and year-over-year analysis of your meal and entertainment spending categories.
Business trips are a constant in the life of the business owner. Eligible expenses must be “ordinary and necessary” aspects of traveling away for your business or profession. “Ordinary and necessary” travel suggests that your work necessitates that you be out of the general area of where you typically do business. For example, the costs of traveling to a convention that benefits your business are deductible. Likewise, travel expenses for renting a vehicle are only deductible for the business-use portion of your trip. The general rule of thumb is that every aspect of your travel must have an explicitly business-related purpose.
It’s key for you to maintain records of these trips so that you may reference them and qualify your deductions. Request and save all receipts! Whether it’s airfare, taxi, Uber costs, parking and tolls, lodging, tips, or luggage fees, you must have an organizational documentation strategy in place to take advantage of and justify these deductions. Having a digital folder for confirmation emails from airlines, hotels, and car rentals is a hassle-free record-keeping structure. If you’re a bit old-school, a travel file in your briefcase never fails to track all manner of documentation of your travel expenses.
Conferences & Networking
The pandemic has necessitated solitude and self-directed learning—it may have felt like finding ways to exchange ideas and information has been incredibly difficult. Advisors can especially benefit from finding new technology solutions, industry pathways, and networking with other advisors from around the country (#XYPNLIVE, anybody?). Informational and networking events will prove extremely valuable in the near future, especially considering all that we have learned in the recent past.
The cost of attending client meetings, networking events, and business conferences are deductible expenses, so long as there is a business purpose to the event. Tickets and meeting space costs are distinct from travel expense categories. However, any lodging and transportation expenses still fall under travel expenses. These types of expenses are fairly easy to organize and record.
Since in-person client meetings are already returning, let’s review how to record business vehicle expenses. Deductible auto expenses can be calculated using either the standard mileage method or the actual expense method. If you own an economical vehicle, a standard mileage rate typically provides a bigger deduction. A vehicle with higher operating costs (gas, repairs, maintenance) typically sees the actual expense method providing a bigger deduction.
We highly recommend that you speak to your CPA about how to best handle vehicle use for your business. They will know best if you should reimburse yourself for mileage or whether to buy or lease a vehicle solely for business purposes. If you qualify for either method, calculating the benefit of both deductions will provide you with the most insight on which to choose.
Standard Mileage Method
In order to project which method will be more optimal for your business, you must note that the standard mileage rate is 56 cents per mile for 2021. You will calculate the total number of miles driven during the year, and subsequently, the total number of miles driven just for business. “Business miles” is a rather self-explanatory metric—meeting with clients and vendors are common examples of driving for a business purpose. Commutes between the office and home are not deductible, nor are any other personal trips.
The standard mileage rate does not require you to sum your car-related expense receipts at tax time and claiming the deduction does not involve much paperwork.
Actual Mileage Method
The actual mileage method is another appropriately named convention. You will calculate the total expenses incurred during the business use of the vehicle. The portion of expenses that can be deducted is a percentage of time—based on miles—that the vehicle is used for business. Deductible auto-related expenses under the actual mileage method include:
- Registration fees and taxes
- Vehicle loan interest
- Rental/lease payments
- Garage rent
- Tolls/parking fees
If you have received PPP funding, we must remind you that you should apply for forgiveness and send the forgiveness documentation to your CPA and bookkeeper. Getting that PPP liability off of your balance sheet should be done sooner rather than later!
The distanced and virtual world has had its perks, but there is only so much that can be accomplished through a computer screen. Broadening your business relationships, expanding your reach, and developing your service through networking and attending events is paramount for any successful business. As an advisor, building trust and being available for your clients is incredibly important to retain that business and grow your existing customer base. Travel, conferences and networking, auto, and business meal expenses are prime opportunities to maximize your tax deductions and minimize your tax liability. If you have any specific questions about expensing or bookkeeping in general, reach out to the XY Bean Counters team—we would love to help you out.