Have fun on Uncle Sam
By Mark E. Battersby

The ability to build and maintain a successful chiropractic practice, network at every opportunity and keep the staff motivated, often boils down to money.

However, when creating our tax system, lawmakers realized the important role that fun and enjoyment play in the success of any business or professional practice.

Consequently, the tax rules recognize the value of keeping patients happy, courting medical professionals as a source of referrals and celebrating with employees, as well as how important a positive working environment can be.

Many entertainment expenses that are both ordinary and necessary in carrying on a trade or business have been designated tax-deductible.

Now, you can have fun and, as a result, enjoy sizeable tax breaks — but you must play by the rules.

ENTERTAINMENT ACCORDING TO THE TAX CODE

Entertainment, under our tax rules, cannot be lavish or extravagent and must be practice-oriented in order to qualify as a tax deduction. Beyond that, tax-deductible entertainment can range from lunch with colleagues who provide referrals to taking potential sources of referrals to a cultural or sporting event.

Unfortunately, the tax rules no longer permit tax deductions for so-called entertainment “facilities” such as yachts, hunting lodges, swimming pools, tennis courts or bowling alleys. Expenses for recreational facilities that are primarily for the benefit of employees are, however, usually deductible.

Of course, no deduction is allowed for the cost of entertainment, amusement or recreation unless it is either directly related to the active conduct of the practice and takes place directly before or after a substantial and bona fide business discussion.

Two additional restrictions placed on the deduction for meal expenses are:

• You or an employee of your practice must be present at the meal, and

• The infamous “50-percent” cap on deductions — only 50 percent of allowable meal and entertainment expenses are tax deductible.

DIRECTLY RELATED?

For an entertainment expense to meet the tax law’s “directly related” criterion, you must have had more than a vague expectation of deriving income or some other business benefit as a result of providing the entertainment.

“Associated” entertainment expenses, as defined by the IRS, include expenditures made in good faith to obtain new business or encourage continuation of existing business relationships. Remember, though, that a business discussion must be the principal aspect of the combined entertainment and business event, and must represent an active effort on the part of the chiropractor to obtain income or other specific benefit.

Many other entertainment expenses, especially those for employees, are deductible, provided that they meet the “ordinary and necessary” requirements:

• Food and beverages furnished on your premises for employees;

• Services, goods and facilities that are treated as compensation or wages for withholding tax purposes;

• Recreation primarily for employees who, for this purpose, are not highly compensated.;

• Expenses associated with employee meetings, principal meetings or other practice-realted business meetings;

• Expenses directly related and necessary to attend a business meeting of a tax-exempt business league, such as a real estate board, chamber of commerce or professional board.

HALF BETTER THAN NOTHING

As previously mentioned, the amount allowed as a deduction for meals and entertainment is generally limited to 50 percent of those expenses. Food and beverage costs incurred in the course of travel away from home also fall within this restriction. However, the 50-percent rule is applied only after determining the amount of the otherwise allowable deduction.

In order to claim any tax deduction, you must be able to verify that the expenses were in fact paid or incurred. Keep records such as receipts, canceled checks and other documents that support the eligibility of the deduction, indicating the amount, time and place and business purpose. For entertainment and gift expenses, the business relationship of the person being entertained or receiving the gift must also be substantiated.

When your employees incur deductible business entertainment expenses, they, too, must keep adequate records for substantiating these expenses on your tax return. This may require them to submit an account book, expense diary or log, or similar record. In many cases, this requirement can be satisfied by using a “per diem” allow-ance for lodging and/or meal and incidental expenses.

Documentary evidence such as receipts or paid bills is not usually required for expenses less than $75, but is mandatory for the lodging expense portion of any travel.

GIVING IS ALSO FUN

The tax deductions that you may claim for business gifts are limited to $25 per recipient per year. Of course, items of an advertising nature that cost $4 or less and signs, display racks or other promotion materials given for use on business premises are not tax-deductible gifts under the current rules.

Similarly, the costs to an employer of food gifts such as holiday turkeys, hams and other merchandise of similar nominal value that are distributed to employees, primarily to promote good relations, is deductible as ordinary and necessary expenses. They are not taxable income to the employee.

In fact, your practice may provide other tax-deductible benefits to employees with the aim of maintaining a happy and contented workforce. Employee discounts, the use of a copy machine for personal purposes, transit passes and free parking are all tax-free to the employee.

In addition, the value of any on-premises athletic facility provided and operated by an employer is considered a nontaxable fringe benefit.

Even occasional cocktail parties, group meals or picnics for employees are considered de minimis fringe benefits, tax-free to the employee and a deductible expense for the employer.

Our lawmakers long ago realized the value of entertainment and gifts — for both employee job satisfaction and the cultivation of business relationships— to every successful practice and business. Why not create your own happier, more enjoyable — and more profitable chiropractic practice using our tax laws?

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult your professional advisor about issues related to your practice.