Tag: Business Expenses

Posted on by Jan Roberg

Deducting Di Minimus Fringe Benefits

Di minimus fringe benefits can be a better business deduction than gifts.

“Di minimus” sounds so fancy. It’s a Latin term meaning about minimal things. According to the IRS, a di minimus benefit is

one for which, considering it’s value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.

According to the IRS website, an item over $100 could not be considered to be di minimus, but they haven’t actually given us an exact number of what is considered to be di minimus which makes things a little foggy. Is it $99? That’s probably pushing it. There’s an article by the Bradford Tax Institute that suggests $50-$70. I feel like that’s a pretty decent guideline.

I really like the di minimus fringe benefits rules because it gives me a little more room to work. If I’m buying a business gift, I’m limited to spending $25 per family for the entire year. Check out my post about What Business Gifts Can I Deduct on My Tax Return here. But if I’m buying something for one of my employees, I can use the di minimus rules and spend a little more.

What counts as di minimus fringe benefits?

  • Occasional snacks, coffee, donuts
  • Holiday gifts
  • Occasional tickets for entertainment events
  • Flowers, fruit, books etc. provided under special circumstances
  • Occasional parties or picnics
  • Occasional meal money or travel expenses for working overtime
  • Group term life insurance with a face value of not more than $2,000
  • Personal use of a cell phone provided by the employer primarily for business

What can never be di minimus?

Gift cards, gift certificates and cash – no matter how small the amount is. If you give a “gift” to an employee of cash, a gift certificate or a gift card, it must get included in her wages as W2 income. Not only will your employee pay income tax on the gift, but there will also be social security and medicare taxes as well.

What makes the di minimus fringe benefits so cool?

Well for one thing, they are tax deductible to the employer. As an employer, that always makes me happy. And, they are tax free to my employees, and that makes them happy. It’s a win-win for us all. And I’m not limited to the $25 a year gift rule. I can buy my employees birthday gifts, holiday gifts, and just “Hey, you’re awesome!” gifts, as long as it’s occasional and not being used to replace their income. Let’s get real here, flowers and candy will never replace a decent wage, you’ve got to do that first. But an occasional gift to tell them that they’re awesome on top of a decent wage? That’s a winner!

And those flowers, fruit baskets and books? The di minimus rules aren’t just for your employees, you can also give them to your corporate directors, independent contractors, partners in a partnership and even yourself!

The other really cool thing is that you can give your employees tickets to an entertainment event. Under the new tax law, entertainment isn’t deductible any more – but as a di minimus fringe benefit it is. You can’t give away season tickets, but you can give away tickets to a single show.

The IRS doesn’t give us a whole lot of guidance on these di minimus fringe benefits. They use the term “occasional” a whole lot without ever defining how often occasional is. The IRS uses the term “facts and circumstances” so I would think flowers for a funeral or a hospital gift for an illness would pass muster. And IRS Pub. 15-B specifically mentions birthday and holiday gifts so that should be okay too.

You may have heard the old saying, “Pigs get fed, hogs get slaughtered.” Do take advantage of the di minimus fringe benefit rules, just don’t abuse them.

Posted on by Jan Roberg

Small Business Expenses: Advertising vs. Charity (Purple Pig Purchases)

Purple-Pig

 

 

 

At first blush, you might think that advertising and charity don’t go together at all.  But when you own a small business, your advertising and charity might just go hand in hand.  Let me explain.

 

When you own a small business, you’ll get lots of calls from organizations wanting your business to make donations to charities.  When you’re a sole proprietor, partnership, or S Corporation, your charitable donations don’t reduce your business income, they only count as a charity donation on your Schedule A personal tax return.

 

So—let’s say you want to donate $100 to Cystic Fibrosis from your business.  That’s all fine and good, but that donation doesn’t reduce your business income by $100.  It doesn’t reduce your business income by anything at all.  You still get to deduct it on your Schedule A—but if you don’t itemize your deductions, that $100 donation doesn’t help your tax return at all.

 

This is where advertising comes in.  Instead of just donating $100 to a charity, you can buy an ad in a charity event program, that way you’re giving money to the charity, and getting a 100% business write-off for the advertising.  The charity still gets your money, and you get a better write-off.

 

Why do you want to your business donation to be  advertising?  The taxes!  If you have a sole proprietorship and you’re in the 25% tax bracket, your business income is actually taxed at 40.3%.  (25% regular tax rate plus 15.3% self employment tax.)  If you itemize your deductions, your $100 donation would really only cost you $75 (but only if you can itemize your donations.)  But if you can count it as a business expense, then your $100 donation would really only cost you $59.70. ($100 minus $40.30) See why this is a good thing?

 

Of course, there are some things that are just going to be charitable donations no matter how you try to align them.  Your tithe or temple dues simply won’t count as advertising.   But when you’re looking at charities that you like to support, be sure to check out the advertising opportunities.

 

So what’s with the purple pig?  A not for profit I support held an event for kids.  Instead of just donating money, I got to set up a booth and hand out my fliers to the parents.  The pig was part of a pig race game for the kids.  The pig is a 100% deductible business expense—and he’s really cute.   Cute and deductible—that works for me.

Posted on by Jan Roberg

The Petty Cash Account

Bank Bag Lock

Photo by Laura Gilmore at Flickr.com - Some companies use a bank bag with a lock to keep their petty cash in.

 

Petty Cash Expenses Template – This is a free download to keep track of your petty cash.  Please feel free to share it or alter it to suit your needs.

 

A while back I did a post about taking cash for your business out of the ATM machine.  I said you should never do it.  I’ve gotten a lot of push back from readers who need to use cash for their businesses on a regular basis.  Here’s an example from Tracy who writes:

 

“What options do I have when I need to pay for cash transactions like Mass Transit & Taxi’s (I don’t drive) which total over 250/mo.(expendable as fringe benefits per IRS 15-B), or even office & software supplies?

Credit Cards don’t issue without corporate credit (which will take a year +), so can only use Prepaid Cash cards – which have to be paid by cash.

There are very few places where I can use my corporation check.  So using checks as a paper record is out.

What do I do?”


Tracy has a good point.  What do you do when you’ve got to use cash?  You need to set up a petty cash account.  In Tracy’s case, I’d say her petty cash account needs to be $250—but it’s really up to her as to how much cash she needs to keep around for her business.  I have one client who regularly keeps $1000 cash available; it all depends upon your type of business and what works for best for you.

 

With a petty cash account, you have your base amount-we’ll use $250 for Tracy’s example.  The first step is to write a check (or take out the cash) to Petty Cash.  Establish a place to keep the petty cash money separate from your regular spending money.  As Tracy spends down the money—on Taxis and subway fares and other business expenses, she keeps receipts for everything.  Or at least a log of things like subway fares.  Technically, what she should do is make a report like what I’m showing below:

 

7/24       Subway                  1.20

7/25       Taxi                       18.00

7/25       Office supplies   24.76

7/25       luncheo n             12.16

7/26       taxi                       23.45

7/27       office supplies    88.22

7/29       Subway                  4.20

Total                                   171.99

 

At the end of the week, or month, or whenever it makes sense to replenish the cash supply, Tracy would write another check for $171.99 to bring the petty cash account back up to $250.

 

That’s the technically correct way to maintaining your petty cash account.  Basically you have a base amount and there are receipts for whatever cash is no longer in the bag.

 

But what about real life?  I say that because 80% of the people who use cash for their businesses aren’t going to be so disciplined.  But I don’t want you getting into audit trouble for your cash withdrawals from the ATM.

 

Let’s use John as an example.  If you look at John’s business bank statements for the past year, he’s got about 100 ATM transactions over the course of the year, usually taking out $40 at a time.  If John were to be audited by the IRS, the IRS would count that $4000 business profit which is taxable to John, even though he spent that entire amount on business.

 

I can tell John to do the Petty Cash account the way I explained above, but being realistic it’s never going to happen.  He’s going to keep going to the ATM and grabbing cash whenever he needs it.  So how does John cover his behind?  Keep receipts!  If you don’t get receipts, write everything down.

 

For example:  John has a property management company that takes care of several single family homes and some small apartment buildings around town.  One of the homes is currently vacant but he needs to keep it looking good so it can rent.  Although a tenant would be responsible for mowing his own lawn, John hires a neighbor kid to mow the grass a few times while to house is still vacant.  It costs him $40 a pop.  He’s paying a kid, not a business.  No 1099MISCs, (he won’t get close to paying him $600).  The kid might not even have a checking account so he can’t accept a check or credit card.  The kid is not issuing receipts-he’s a kid.

 

John goes to the ATM, gets $40 to pay the kid and he writes down on the ATM slip a few notes about the expense.  (Paid Walter $40 to mow 541 Mockingbird St. house.)  John keeps that ATM slip with his business records to act as his business receipt.  As long as John spends less than $75 on something—that will be acceptable.  If John spends more than $75, he needs a receipt from the vendor.  (Even if the vendor is a 16 year old kid.)

 

I still recommend not using the ATM for your business expenses whenever possible, but if you must, you can protect yourself from having the IRS count your cash transactions as income to yourself—and paying more taxes by keeping good records of the transactions.