U.S. Tax Form 1120-F or 1120

Source Link: http://www.rpifs.com/AICPA/form1120f.htm

Who Must Use This Form?
This form is to be used by a foreign corporation that has income that is "effectively connected" with a U.S. trade or business. Generally, that means any foreign corporation that has an employee, office, warehouse or production facility in the U.S.. 
What Information Is Required?
The information required is substantially similar to that required on a domestic corporation income tax return (Form 1120), except that allocations may be required of U.S. source and foreign source income and any related expenses or taxes. 
When Is It Due?
For a foreign corporation with an office or place of business in the U.S., the filing date is the 15th of March. A six month automatic extension of time to file the return (but not to pay any tax due) may be requested on Form 7004. For a foreign corporation that does not have an office or fixed place of business in the U.S., the form must be filed by 15th of June, but a six month extension of time to file may be requested with Form 7004. 
Where Should It Be Filed?
File with the Internal Revenue Service Center, Philadelphia, PA 19255
How Long Does It Take To Prepare?
The IRS instructions state that the average time to prepare this form is 77.5 hours. That doesn't include the time required to learn about the law or to accumulate the required records. In most respects, it's the same as the preparation of a domestic corporation income tax return on Form 1120, except that allocations may be required between U.S. source income and expenses and foreign source. 
Why Comply ? (Penalties)
The penalties are the same as for a failure to file a U.S. corporation tax return.
Comments
A foreign corporation that does not have an office or place of business in the U.S. but which does have some U.S. source income should seek assistance from a U.S. tax preparer who is familiar with the rules for this form. 
The form is not required if the corporation did not engage in any trade or business within the US and if all of its US source income was subject to withholding at the source. 
It does not matter if the foreign corporation is owned by non US persons or by US persons or some combination. If the corporation is domiciled in a country other than the US, it will be a foreign corporation. It may be possible for a foreign person to own a corporation that is domiciled in the US -- in which case the foreign owner would be required to file a Form 5472 .
If a foreign corporation is controlled by U.S. shareholders, those shareholders may be required to file a Form 5471 .
For a copy of the Form and Instructions see http://www.irs.gov/formspubs/index.html
 
Index to Tax Forms
 

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Restricted Stock Units (RSU) Sales and Tax Reporting

 Article Source: http://thefinancebuff.com/restricted-stock-units-rsu-sales-and.html

By TFB

RSU stands for Restricted Stock Units. It’s the new form of stock-based compensation that has gained popularity after the employers are required to expense employee stock options. The biggest difference between RSUs and employee stock options is that RSUs are taxed at the time of vesting while stock options are usually taxed at the time of option exercise. The employer is required to withhold taxes as soon as the RSUs become vested.
In a previous post, Restricted Stock Units (RSU) Tax Withholding Choices, I wrote about what I chose among the three tax withholding choices — same day sale, sell to cover, and cash transfer — and why. This time I’m writing about how to account for taxes on the tax return, especially if you use tax software like TurboTax or H&R Block At Home.
I’m going to use this simple example:

Suppose you had 100 RSUs vested on October 31. The closing price of the stock on that day is $50, and the tax withholding rate is 40%.

Regardless of which choice you made for tax withholding — some employers don’t give you a choice  — your employer will include on your W-2 as wages the total value of the vested RSUs. In our example, it’s $50 * 100 = $5,000. They will also withhold the same amount of taxes regardless of your choice. In this example it’s $5,000 * 40% = $2,000. They will also include the taxes withheld on your W-2. How you account for taxes on your tax return for the rest will depend on your tax withholding choice.
1. Net Issuance. In net issuance, you don’t have a choice about tax withholding. The employer will deduct a number of shares from your vested shares and give you the rest. You do not receive a 1099-B from a broker for the shares you didn’t receive. In our example, although your employer says you have 100 shares vested, you actually only receive 60 shares.
You don’t have to report anything for the vesting event. Use the numbers on your W-2 as-is.
Make a note of the closing price on the vesting date. You have to remember the date and this number until you sell the remaining shares. In our example, that’s $50 per share. If you sell the 60 shares for more than $50 per  share, you will have a capital gain. If you sell them for less, you will have a capital loss. You report the capital gain or loss in the year you sell the remaining shares.
2. Same Day Sale. If you make this choice, you sell everything. Let’s say on the day after the vesting date the shares are sold for a total of $4,989. The employer withholds $2,000. You are left with $2,989. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $4,989. You enter in TurboTax or H&R Block At Home, or on Schedule D of Form 1040:

Description: 100 shares XYZ, Inc.
Net Proceeds: 4,989
Date of Sale: 11/01/20xx
Cost Basis: 5,000
Date Acquired: 10/31/20xx

Your cost basis is the amount your employer included on your W-2, which is the closing price on the vesting date times the number of shares vested. In this example, you will show a short-term loss of $11 on your tax return because of the brokerage commission and the SEC fee. The income and the associated tax withholdings are already included on your W-2. Use those numbers as-is.
3. Sell to Cover. [Update on April 9, 2008: I wrote a follow-up post RSU Sell To Cover Deconstructed to clarify this option. Jump ahead to that post if you'd like.] If you make this choice, or if you don’t have a choice, your employer sells just enough shares to cover the tax withholding. The key difference between Sell to Cover and Net Issuance is that the employer uses a broker in Sell to Cover but doesn’t use a broker in Net Issuance. Suppose 41 shares are sold for $2,030. The employer takes away $2,000 for tax withholding. You are left with $30 in cash and the remaining 59 shares. At tax time, you will receive a 1099-B from your broker listing the stock sale proceed of $2,030. You enter in TurboTax, H&R Block At Home, or on Schedule D of Form 1040:

Description: 41 shares XYZ, Inc.
Net Proceeds: 2,030
Date of Sale: 11/01/20xx
Cost Basis: 2,050
Date Acquired: 10/31/20xx

Once again, your cost basis for the shares you sold is the amount your employer included on your W-2 for those shares, which is the closing price on the vesting date times the number of shares you sold for tax withholding ($50 * 41 = $2,050). After the sale, you show a short-term loss of $2,050 – $2,030 = $20 because of the brokerage commission and the SEC fee. Again, the income and the associated tax withholdings are already included on your W-2; you just use those numbers as-is.
For the remaining 59 shares, you keep a cost basis of $50 per share ($50 * 59 = $2,950). You have to remember the date and this number until you sell the remaining shares. Whenever you sell them, you enter in TurboTax, H&R Block At Home, or on Schedule D of Form 1040:

Description: 59 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 2,950
Date Acquired: 10/31/20xx

You will show a short-term or long-term gain or loss for these remaining shares depending on your date of sale and the sale price.
4. Cash Transfer. If you make this choice, you give your employer cash for the tax withholding. They don’t sell any of your shares. You can sell the shares either immediately or keep them for however long you like. The tax accounting is the same as if you bought the shares at the closing price on the vesting date. Whenever you sell them, you enter in TurboTax, H&R Block At Home, or on Schedule D of Form 1040:

Description: 100 shares XYZ, Inc.
Net Proceeds: whatever you sell them for, copy from 1099-B
Date of Sale: your date of sale
Cost Basis: 5,000
Date Acquired: 10/31/20xx

You will show a short-term or long-term gain or loss for these shares depending on your date of sale and the sale price. The income from RSU vesting and the associated tax withholdings are already included on your W-2, and you just use those numbers as-is.
That’s all. Hope this is helpful to someone looking for info on the tax treatment and implications of RSU sales.

Income Tax Changes 2010

Source: http://www.money-zine.com/Financial-Planning/Tax-Shelter/Income-Tax-Changes-2010/

What better way to start the New Year then with a review of the income tax changes for 2010?  Due to the economic recession, there were not a lot of changes to the tax provisions in 2010.  That being said, we will outline changes to Social Security, standard deductions, exemptions, mileage rate deductions, earned income credits, Hope and Lifetime Learning tax credits, as well as changes to retirement savings accounts such as 401k plans, IRAs, and Roth plans.

Federal Income Tax Filing Deadline

The tax filing deadline for the tax year 2009 is April 15, 2010 - which falls on a Thursday.  In the remainder of this publication, we're going to be discussing the changes that became effective in the tax year 2010, which will become part of your income tax filing in 2011.

Social Security and Medicare

For 2010, the Medicare tax will remain at 1.45% while Social Security remains at 6.20%.  The wage limit, or Social Security maximum, remains at $106,800 - the same value as was in place during 2009.  The Cost of Living Adjustment (COLA) was 0.0% - a direct reflection of the slow growth we're experiencing in the U.S. economy.

Standard Deductions in 2010

According to the IRS, around two out of every three taxpayers claim the standard deduction on their income tax returns.  In 2010, there was only one change to the standard deductions - the head of household standard deduction went up by $50.  The deduction for all other taxpayers remained the same.  The standard deductions that apply in 2010 include:

• Single - $5,700
• Married filing separately - $5,700
• Head of household - $8,400
• Married taxpayers filing jointly / qualifying widow(er)s  - $11,400

Exemption Values

The amount you can deduct for each exemption you claim on your federal income taxes in 2010 did not increase from 2009.  The 2010 value of $3,650 is the same value of an exemption in 2009.  Here again, we saw no increase in 2010 and only a $250 increase over the last three years.

Mileage Deduction Rates

Studies funded by the IRS demonstrate that it's less expensive to drive a car in 2010.  And that means the standard mileage deduction rates are decreasing.  The following table outlines the mileage deduction rates for the tax year 2010:

Mileage Deduction Rates 2010

Category	Rate
Business Miles	50.0 cents per mile
Charitable Services	14.0 cents per mile
Medical Travel	16.5 cents per mile

2010 Increase to Earned Income Credit

The earned income credit applies to working taxpayers that have earned income that falls below certain thresholds.  The qualification threshold depends on the number of persons in each family.  The thresholds in 2010 to qualify for this credit include:

• No Children - earnings must be less than $13,460 or $18,470 if married filing jointly.
• One Child - earnings must be less than $35,535 or $40,545 if married filing jointly.
• Two Children - earnings must be less than $40,363 or $45,373 if married filing jointly.
• Three or More Children - earnings must be less than $43,352 or $48,362 if married filing jointly.

The credits themselves have also increase in 2010, with the maximum credits that can be received as indicated below:

• No Children - $457
• One Child - $3,050
• Two Children - $5,036
• Three or More Children - $5,666

Lifetime Learning and Hope Credits

In 2010, tax law changes also apply to the Hope Credit.  The maximum Hope Credit, available for the first two years of post-secondary education, has increased to $2,500.  This includes 100% of qualifying tuition and related expense not in excess of $2,000 plus 25% of those expenses that do not exceed $4,000.
 In 2010, the taxpayer's modified adjusted gross income will be used to determine the reduction in the amount of the Hope Scholarship and Lifetime Learning Credits.  Credit reductions start for taxpayers with an AGI in excess of $80,000, or $160,000 for those filing joint returns for the Hope Credit.  The threshold for the Lifetime Learning Credit remains at $50,000, or $100,000 for those filing joint returns in 2010.

Contributions to Retirement Accounts

There was not a lot of good news in 2010 for those individuals looking to increase the rate of savings into their retirement accounts.  Contribution limits for 401k as well as 403b plans remained the same in 2010 at $16,500.  Catch up contributions also remained at $5,500 in 2010.  Contribution limits to SIMPLE retirement plans also remained at $11,500, as did the catch up contribution limit of $2,500.
The income limits for those willing to contribute to traditional IRAs as well as Roth IRA plans increased modestly in 2010.  The income phase-out threshold for Roth IRAs now starts at $167,000 for those filing joint returns - an increase of $1,000.  There was no change for taxpayers filing as head of household or single.
Finally, if you're covered by a retirement plan at work and you are considering contributing to a tax-deductible traditional IRA, then the 2010 income phase-out limits start at $89,000 for joint filers (same as 2009), and increases to $56,000 for those with a filing status of single or head of household.

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About the Author - Income Tax Changes 2010

Copyright © 2009 Money-Zine.com

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When are services subject to California sales tax?

 Source: http://www.calcpa.org/Content/25604.aspx

Q: I’m a tailor based in California. Since I provide a service, do I have to charge sales tax?

Because of your particular situation, there is no easy answer to this question. You may sometimes have to charge sales tax, while at other times you should not.
California law restricts the application of sales or use tax to transfers or consumption of tangible personal property or physical property other than real estate. Unlike many other states, California does not tax services unless they are an integral part of a taxable transfer of property. The law does not specifically name most services as exempt, but such activities are automatically excluded from the tax base because they are outside the definition of tangible personal property.
Two types of service activities still may be swept into the tax base, however. The first is any service that is so tied to the sale of property that it is considered a part of that sale and, thus, inseparable from the measure of the tax. Example: a taxable sale of machinery that the seller must calibrate as a condition of the sale. The calibration fee will be taxable even if the seller separates the charge.
The second taxable service is fabrication. Fabrication (manufacturing) is the labor involved in creating tangible personal property that is different in form or function from its component parts. This type of labor includes something as simple as drilling holes in a metal strap and bending the strap to make a bracket. The charge for drilling and bending would be taxable unless some other exemption applied.
The line between taxable fabrication and nontaxable repair labor can be hard to discern. For example, the alteration of new garments is taxable but the alteration of used clothing is exempt. Thus, if a person buys new clothing and takes it to a tailor to be altered, the tailor must charge sales tax on both the labor and the price of any materials provided. Reason: the alteration is regarded as a step in the creation of a new item, which is taxable fabrication. (See California Sales and Use Tax Regulation 1524(b)(1)(A).)
Conversely, if the same person buys the clothing, wears it, and then brings it to the same tailor for the same alteration, the tailor’s services will be regarded as exempt repair or restoration labor. The tax will only apply to the sale of any accompanying materials and supplies, and then only if either the retail value of the materials and supplies is separately stated on the bill or the value exceeds 10 percent of the tailor’s total charge. (California Sales and Use Tax Regulation 1524(b)(1)(B).)
Sales and use tax law is often assumed to be relatively simple and straightforward.
As you can see, that assumption may be hazardous to your financial health.


Dan Davis, CPA, CFE, is a partner with Associated Sales Tax Consultants in Sacramento. You can reach him at 888-369-1202 or ddavis@astc.com.

What can I deduct as an independent contractor?

Article Source: http://locumlife.modernmedicine.com/locumlife/article/articleDetail.jsp?id=176558&sk=&date=&pageID=1  Aug 1, 2005By: Dan Kobaly, EALocumLife This month, we will look at some of the different categories of tax deductions available to independent contractors. Even though each entity—sole proprietor, C-corporation, S-corporation, and Limited Liability Company (LLC)—is required to file a specific tax form, and there are some differences (especially at the state level), the rules for deductions are predominantly similar, particularly for a single-member or "closely held" entity. GENERAL RULES First, according to Internal Revenue Service (IRS) Publication 535, Business Expenses, "in order to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary." Because of the broad scope of this definition, in audit, IRS generally only denies the most flagrant expenses—and more often attempts to differentiate and deny non-deductible personal expenses. However, even the business use percentage of an otherwise personal expense is also deductible (such as the portion of a vacation spent conducting business.) Also, IRS always looks at the individual "facts and circumstances" of a claimed business deduction to determine if there is a "preponderance of evidence" to support the use of the expense to reduce income. As a result, a given expense may be deductible for one business, but not another. IRS also requires documentary evidence of any expense over $75, such as receipts, bills, or cancelled checks. A diary or log is sufficient evidence for mileage deductions. Most independent contractor business deductions reduce net self-employment income—which reduces self-employment tax (15.2%), as well as federal tax (up to 35%) and state taxes. The few allowable personal deductions (1040 Schedule A) and employee unreimbursed employee expenses (1040 form 2106) only reduce federal and state taxes. TRAVEL EXPENSES If you maintain a permanent "tax home" that you return to on a regular basis to live and work, then you may deduct travel expenses between temporary assignments (less than 12 months). Any additional costs for your family would not be deductible. If you do not maintain a permanent home, then you are considered an "itinerant worker"— wherever you work is considered your tax home, and the travel expenses between assignments are not deductible. If your assignment is, or becomes permanent, then you may deduct some costs as personal moving expenses (on 1040 form 3903), but not as business expenses. Should your agency not provide reimbursement for travel (typically airline fares), hotel, rental car, or gas, you may deduct these out-of-pocket travel expenses. Additional items that can be deducted include fees for U-Hauls, packing supplies, storage, tolls, parking, and vehicle expenses such as mileage. VEHICLE EXPENSES These types of costs are deductible when traveling between temporary assignments (less than 12 months) and while on temporary assignment. They are not deductible for personal use, including commuting to and from a permanent job. There are two ways to deduct vehicle expenses—using either the business-use percentage of actual expenses or using the current federal mileage rate. Actual expenses include gas, maintenance, repairs, insurance, license, lease payments, and/or depreciation. The mileage rate for 2005 is 40.5 cents per mile; up from 37.5 cents for 2004, and includes all vehicle expenses except tolls and parking. TEMPORARY LIVING EXPENSES Generally, the largest deduction for locum tenens physicians with a permanent home is temporary living expenses while working away from their residences. If you maintain a permanent home, and return there on a regular basis to live and work, then you may deduct all duplicated out-of-pocket expenses while on temporary assignment—including housing, utilities, and half of your meals. As an alternative, you may use a daily meal per diem rate from IRS publication 1542, without receipts. However, keep in mind that you may not deduct the lodging per diem found in this publication, which is for employers to use for reimbursements.  Any deductions taken should be offset by reimbursements, stipends, or allowances. Reimbursements received on a dollar-for-dollar accounting program are not included as income to you and not deductible. In addition, any stipends or in-kind benefits you may receive on temporary assignment (such as a lodging stipend or apartment), that you would have been able to deduct had you paid for them, are tax-free to you. PROFESSIONAL EXPENSES All licensure expenses are deductible—including state license fees, DEA license fees, drug testing, and fingerprinting; as well as continuing education expenses and seminars. Also, any contractor paid liability insurance is deductible—such as malpractice insurance—if you purchase your own policy. Special-use clothing and equipment, such as scrubs, shoes, lab coats, and stethoscope, may be deducted, as well. Care and maintenance—from laundering to cleaning—also falls into this category, whether on temporary assignment or at home. Professional journals, subscriptions, and reference books are also deductible. The business-use percentage of Internet expenses and cost of any on-line research can be deducted, too. TELEPHONE EXPENSES You cannot deduct any charges for basic local telephone service for the first telephone line to your home, even if used for business, or required for on-call. However, you can deduct business long distance, any additional business line, and extra features for business use, such as call waiting. Additionally, answering service expenses are deductible. For cell phones, the cost of all billable business calls can be deducted. It also seems appropriate, though not audit-tested, to take a percentage of initial so-called "free" air minutes based on the business-use percentage of total minutes, as well as the cost of the phone if it—and its charges—are not covered by your staffing company. CAPITAL EQUIPMENT The purchase cost of business-use equipment with a useful life of more than one year ("capital equipment"), such as vehicles, computers, PDAs, furniture, cell phones, and office equipment is supposed to be spread over the life of the equipment (depreciation). However, the business owner may, under tax code section 179, elect to accelerate some portion of the depreciation into the year of purchase. This is available for up to $100,000 of capital equipment for 2005 through 2008; but is scheduled to drop back to the old limit of $25,000 for 2008. Depreciation has many pitfalls, especially since not all states follow federal guidelines, and should probably be left to a professional. HOME OFFICE Taking "home office" expenses for business conducted at home is risky due to the restrictions of defining such an entity and the red flag nature of deducting it. Fortunately, home office deductions at temporary assignments for locum tenens physicians is inconsistent with the deduction of temporary living expenses—since the entire cost of temporary lodging is already deductible. INSURANCE In addition to malpractice insurance and vehicle insurance (if using the actual expense method), independent contractors who are self-employed may currently deduct 100% of health insurance premiums paid on behalf of the owner, as well as his/her spouse and dependents. However, while the deduction reduces federal and state income taxes, it does not lower self-employment tax. Life insurance premiums, on the other hand, are a personal, non-deductible expense. NON-DEDUCTIBLES Other non-business expenses include personal income taxes (federal, state, and local—although state and local taxes may be taken as a personal deduction on 1040 schedule A), charitable contributions, and political contributions. The last word. While this discussion could not cover all possible deductible or non-deductible business expenses, any omissions hold little if any significance. For more information, explore http://www.irs.gov/. REFERENCES Internal Revenue Service. (2005, May). Per diem rates [IRS Publication 1542]. Washington, DC: Author.

Internal Revenue Service. (2004). Business expenses [IRS Publication 535]. Washington, DC: Author.
Internal Revenue Service. (2004). Tax guide for small businesses [IRS Publication 334]. Washington, DC: Author.
Internal Revenue Service. (2004). Travel, entertainment, gift, and car expenses [IRS Publication 463]. Washington, DC: Author.
Internal Revenue Service. (2004). Your federal income tax [IRS Publication 17]. Washington, DC: Author. Internal Revenue Service. (2004, December 6). Optional standard mileage rates, Rev. Proc. 2004–64, Internal Revenue Bulletin 2004-49 [p. 898].
The preceding discussion is general in nature, and should not be considered advice for any individual tax situation. You should consult with your personal tax planning professional for specific guidance relating to your unique circumstances.

Accounting 101 - Deferred Rent 78

 Article resource: http://hubpages.com/hub/Accounting-101-Deferred-Rent

Accounting for Deferred Rent

Note:  The following is from a series of accounting reference articles found on Big4Guru.com.
Deferred Rent
What is it?
The simplest way to understand deferred rent is to think of an example.  Let’s say you started a business and the first thing you did was sign a five-year lease for office space.  In an effort to sign you as a tenant, the landlord (aka “lessor”) offers you lower rent payments in the first year that “escalate” (i.e. go up) as the years progress.  To keep it simple, let’s say the rent schedule is this:
Year 1:   $1,000 / month = $12,000 / year
Year 2:   $1,250 / month = $15,000 / year
Year 3:   $1,500 / month = $18,000 / year
Year 4:   $1,750 / month = $21,000 / year
Year 5:   $2,000 / month = $24,000 / year
These amounts represent the actual cash that you will be paying each month.  When booking the journal entries for this, this will be the credit (either to cash or a payable).  The question is what is the debit?
ASC section 840-20-25-1 states the following:
Rent shall be charged to expense by lessees (reported as income by lessors) over the lease term as it becomes payable (receivable). If rental payments are not made on a straight-line basis, rental expense nevertheless shall be recognized on a straight-line basis unless another systematic and rational basis is more representative of the time pattern in which use benefit is derived from the leased property, in which case that basis shall be used.
You see, the FASB requires that rental expense be “recognized on a straight-line basis.”  This means that the same amount of expense must be recognized each month, regardless of the actual rent payment during the month.  Let’s calculate our monthly rent expense.
From the table above, we can easily compute that the total rent paid over the course of the lease is $90,000.  ($12k +$15k + $18k + $21k + $24k).  This figure, divided by the total months in the lease (60), gives us out straight-line rent expense:
Total Rent / Total Periods = Straight-Line Rent Expense per period
$90,000 / 60 months = $1,500 / month = $18,000 per year. 
We now have the debit in our journal entry.
With a debit to expense for one amount and a credit to cash for another amount, the plug goes to deferred rent.  Depending on the payment schedule, deferred rent can either be an asset or a liability.
In the case of a lease with increasing payments each year, as in our example, deferred rent is a liability.  The liability balance builds through the first two years when the expense exceeds the cash payments, levels off during year 3 when these amounts are equal, and then drops down to zero over the course of the final two years when rent expense is less than the rent payments.  The journal entries for each year are as follows:
Journal Entries – Year 1
Dr. Rent expense        1,500
       Cr. Deferred rent                         500
       Cr. Cash                                       1,000
Journal Entries – Year 2
Dr. Rent expense        1,500
       Cr. Deferred rent                         250
       Cr. Cash                                       1,250
Journal Entries – Year 3
Dr. Rent expense        1,500
       Cr. Cash                                       1,500
Journal Entries – Year 4
Dr. Rent expense        1,500
Dr. Deferred rent            250
       Cr. Cash                                       1,750
Journal Entries – Year 5
Dr. Rent expense        1,500
Dr. Deferred rent            500
       Cr. Cash                                       1,750

Business Meals & Entertainment Expenses

Article Source: http://www.taxpros-plus.com/travelandentertainment.html

Several months ago, I did an article regarding the deductibility of business travel, meals and entertainment.  In this article I would like to revisit some of these issues, as it has been brought to my attention that many businesses are not deducting as much for theses expenses as is allowed.  The percentage of deductibility for meals and entertainment is somewhat confusing and I am hoping that by giving businesses more details on these matters, it will increase their awareness, as well as their business expense deductions, in the future.

Do I need to keep receipts for all meals related to my business?

While it is a good idea to keep receipts and/or a journal documenting all meals and entertainment expenses, receipts are only required for meal expenses of $75 or more.  Documentation of entertainment and meal expenses should include the amount, date, place, people entertained, type of entertainment, business purpose, and business relationship, and notes on the business discussion which occurred immediately before, during or immediately after the meal.

The IRS only allows a 50% deductions for meals and entertainment.  Why do I have to keep such detailed documentation?

It's true that most business expenses for meals and entertainment are only deductible at 50%.  However, some of these expenses are fully deductible.  The documentation is necessary in the event of an audit.  Whether your expense is 50% or 100% deductible, you would hate to have a portion of these deductions disallowed because of lack of documentation.

I was not aware that any meals or entertainment expenses were 100% deductible.  How do I know the difference between a 50% and 100% deductible meal?

The Tax Code has three basic categories that apply to the 50% limitations.  They are:

1. Entertaining clients or customers.
2. Business travel away from home.
3. Attending business conventions, meetings or luncheons.

Chances are if your expense does not fit into one of these categories, it can be fully deducted.

What are some examples of expenses that are 100% deductible?

The following expenses would qualify for a full deduction:

1. Meals provided to employees related to social or recreational activities.  For instance, a company Christmas party, annual picnic, or retirement party would all be fully deductible provided that they include a nondiscriminatory class of employees.
2. Meals that are provided to employees for the convenience of the employer.  These could include meals provided due to short lunch periods, unavailability of nearby eating facilities, necessity of employees being available at all times for emergency phone calls, and meals furnished to food service employees during and immediately before or after their working hours.  Also, meals provided to employees immediately after working hours that would have been provided during working hours for a business purpose, except work duties prevented employees from eating during working hours are included in the 100% deductibility category.  
3. If a meal is provided to more than half of the employees for the employer's convenience, the employer can then deduct meals provided to all employees at 100%.
4. “De minimis” fringe benefits meals also qualify for the 100% deduction.  This includes meals that are provided infrequently or cost so little that it is not worth the time spent to fully account for them.  Examples would be an occasional meal or meal money provided to employees who work late hours or perform work-related duties outside the normal workday, or coffee and doughnuts. 
5. Under the de minimis rule, 100% deductibility may also be allowed for meals provided to “promote goodwill, boost morale, or attract prospective employees.”
6. Meals provided to several prospective clients at one time at which a marketing presentation is made are also 100% deductible.

I was not aware of the 100% deduction for these expenses and have expenses in past years that would qualify for the full deduction.  Can I still get credit for the remaining 50% deduction that wasn't taken?

Yes.  Provided you have adequate records to document such expenses, you can amend your tax returns for up to three prior years and claim the full deduction.  The dollar amount of the additional deduction will no doubt play a role in your decision to amend prior returns. 

And remember, documentation is the key.  The IRS is aware that many businesses do not keep adequate records for meals and entertainment expense, thus creating an audit target.

How can I be sure that I am taking the full allowable deduction on meals and entertainment expenses in the future?

The best way to assure yourself that you are taking these expenses to your fullest advantage is to learn the deduction categories well and keep adequate records documenting these expenses.  Also, teach your employees about the meals and entertainment deduction categories and how to keep records containing the necessary information.