One of the most common expenses for a small business
owner is taking a customer or prospect out for lunch.
While this is a legitimate business expense, it may not
necessarily be tax deductible.
To start, not everything you spend money on can be used
as a tax deduction. You have to consider whether your
work with tarot is a hobby or a business. And your tax
options will be limited even if you earn a profit.
Knowing which common business expenses are deductible
helps a practitioner reduce taxable income while maintaining
cash reserves. For an expense to be deductible, the expense
must be "ordinary and necessary," according to the IRS.
The IRS defines ordinary and necessary business expenses
as expenses that are common and appropriate for the trade or
business. Travel and legal fees are examples of ordinary
expenses, and you should track and report them.
Another possible deduction is the cost of continuing
education, such as Readers Studio or other conferences.
If you ever attend these events, or have to obtain new
skills in tarot and other areas to keep abreast of the
situations affecting your practice, you may be able to
deduct some or all of these expenses as part of operating
your home-based or online business.
According to Bonnie Lee, the founder of Taxpertise
located in Sonoma, CA, there are rules about tax
deductions. The following pointers are excerpted from
her article, Five Rules for Writing Off Meals and
Entertainment Costs, which appeared in the April 7th
edition of Entrepreneur Magazine:
Essentially, the rules say: If you're having way too
much fun, it's not a deductible expense. Here's a primer
on when entertainment expenses count as business or
1. Get down to business.
First, any entertaining you do must be directly related
to the active conduct of your business, or associated
with a directly related discussion that preceded or
followed the meal or entertainment. So if you take me
to lunch and we don't discuss tax planning strategies,
sales projections or problems with your general ledger,
and instead only talk about your 10-year-old's blooming
soccer career, then you won't be able to write off the
2. Keep your wits about you.
The environment must be conducive to conducting business.
An overly-boozy brunch, for instance, wouldn't qualify.
3. Watch your guest list.
When it comes to writing off party expenses, the guest
list also matters. You may deduct 100% of your cost if
the party is either open to the general public or if it's for
employees and their spouses.
- Meal and entertainment costs are only 50% deductible
in most cases. This includes meals you eat while you're
out of town on business.
- No deduction is allowed for meals that are lavish or
extravagant, which depends on the facts of the
particular situation. Special limits apply to skyboxes
at sporting events.
- No deduction is allowed for the use of an
entertainment facility, such as a golf club or fishing
boat, even if you conduct business there (although the
cost of meals at the facility can be deductible).
Another Internal Revenue Service rule says
entertainment can't be "lavish or extravagant."
Although subjective and a gray area that can be argued
with an auditor all the way up to tax court, why
bother? Keep it simple. Make sure the entertainment or
meal is aligned to your company's budget. If your
bottom line is small, you won't likely be allowed to
write off first-class accommodations for potential
clients in town for your party.
4. Document your expenses.
The tax law requires you to substantiate your meal and
entertainment costs in a particular way. You need:
- A receipt, canceled check, or bill showing the cost.
A restaurant receipt should show the name and location
of the restaurant, the number of people you
entertained, and date and cost of the meal. Exception:
You don't have to provide this if the expense is under
- A written record detailing not only the information
you've already included on the restaurant receipt, but
also the business purpose of the expense or the
business benefit that you gained or expect to gain. If
the expenditure was a meal, you (or your employee) must
have been present. If the expenditure was for entertainment
(such as a sporting event or the theater), you must detail
the particulars of the business discussion that took place
before or after the entertainment.
Meal and entertainment write-offs are a highly litigated
area; business owners think their expenses are tax deductible,
while the IRS may think otherwise. Be sure to follow all
the rules so you can avoid conflicts with the IRS and obtain
all the write-offs to which you are entitled. Work with your
tax advisor to help you maximize your write-offs in this area.