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September 24th, 2011Efile Tax Returns
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tax preparation costs deductible
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Tax Preparer Ethics Applied to Deduction of Entertainment Expenses
A frequently abused area of tax deductions is entertainment claimed as a business expense. Therefore, paid tax preparers should exercise diligence in counseling taxpayers about the rules for deduction of entertainment expenditures.
Entertaining business clients or potential clients is fairly common. But not all social activities are tax-deductible. Applying the limitations is an essential part of tax preparer ethics that demand avoiding understatements of taxable income.
The top consideration is the 50 percent rule, which allows taxpayers to deduct only half of their eligible entertainment expenses. In addition, the IRS may further limit deductions that are considered too lavish based upon the type of business and its location.
The 50 percent limitation also applies to entertainment expenses incurred while traveling. Consequently, tax preparation education provides instructions to deduct only half of the outlays for entertainment while traveling although the full costs for transportation and accommodations are tax-deductible.
A most important part of Registered Tax Return Preparer training is learning to confirm with taxpayers the business connection of entertainment expenses. The tax code requires that the main purpose of the entertainment expense is the active conduct of business. A taxpayer must have a more than general expectation of income or specific business benefit at a future time.
However, there is an exception that permits deductible entertainment costs before or after a business meeting. Therefore, a social event such as the theater or a sports function is tax-deductible if it transpires immediately before or after business is conducted. An ethics course reminder is that the cost to include spouses in the entertainment event is not tax-deductible unless the spouses are essential to the business matter.
An RTRP practice should remind taxpayers about the importance of good records in case entertainment deductions are challenged by the IRS. A log or diary of business entertainment expenses is best. Along with the date, the log should indicate details about the individuals involved and the nature of business discussed. If a single expense is more than $75, the IRS requires a receipt to substantiate the amount claimed.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
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