Welcome to our very first Cleared Diagnostics Tax CPA Podcast! Last week Summit CPA Group spent a great time together in Las Vegas for their All Team Retreat experience, and now it seems just about right to discuss an important item that many CPAs and CPA firm owners ask..."Can I deduct this?". In this podcast, we sit down with our host Tom Wadelton and Dave Danic, our Director of Tax to discuss about meals and entertainment deductions.
"We're a CPA firm and we still have to look at this stuff, as we were talking about our retreat - 'How does our retreat fit within the tax law?' We'll have to deliberate internally to see how we want to treat some of these items." - Dave Danic
The finer details of this episode :
Episode resources
Tom Wadelton: Welcome. This is a podcast that we are just getting started and we're really glad that people are here listening. Dave, I'll introduce you, but we're calling this the Clear Diagnostics podcast. You want to talk on how we came up with that name?
Dave Danic: Yeah, of course. Uh it's because one, every other tax podcast name was already taken. [Laugh] No, diagnostics are things that really prevent you from finishing a tax return. And so once you clear your diagnostic it's a very exciting moment. For people in the tax professional, in the tax profession, different tax professionals, listening and watching they will totally get it. They'll recognize that yeah, this guy gets it for sure. So that's why we call it the clear diagnostics podcast.
Tom Wadelton: Great. Tell us a little bit more about you for people listening who are saying, why should I listen to this guy?
Dave Danic: Yeah. They're going to be questioning that very quickly. No, my name's Dave Danic, I'm the Director of Tax Services at Summit CPA group. We are a virtual CFO firm and really proud of what we can do for our clients. We do tax work for a lot of our CFO clients, Tom, you're a CFO, you know, that's our bread and butter of what we do at Summit CPA Group. But along the way, of course, they're business owners. So, they want to talk taxes too. So that's why we exist in this tax department.
Tom Wadelton: Yep. As you said, I am a CFO. My title is Virtual CFO and in that role I have multiple clients and like you said, taxes come up both from a business perspective. Then also, many of them are single owner or just a couple of owners. And so, then their personal taxes come in. The topic we'll talk about today comes up a lot, but I often get questions where you've taught me that I can answer a portion of them or I say, let me get with Dave and I'll come back and give you the answer to that. But it is a fairly frequent thing that comes up. So, tell us a little bit about what we're talking about today.
Dave Danic: Yeah, so there are many things we can talk about, you know, there's going to be a new tax law coming up that stalled in Congress for the time being. It’s 9:11 right now EST as we're recording this, and this is when I usually start thinking about lunch. So, let's talk about eating. Meals and entertainment deductions. I don't know about you Tom, but I'm guessing you get a lot of questions from your clients saying hey, I'm going out to this meal can I deduct this? Or we have our bookkeepers on staff or senior accountants, and we ask them, when we're getting ready for the tax return, to look at a couple of these meals to see if these are deductible or not. There are certainly some opportunities.
Tom Wadelton: Yeah, and remember, tax changes came through all the time. They make headlines, but you get like six words out of what is changing. So that would prompt owners to then come to us and say, does that mean nothing is deductible anymore? What does this mean for me? They force us to really understand the rules to guide them.
Dave Danic: Yeah, absolutely. Yeah. So that first change that came about was that the end of last year when President Trump put through an executive order. I think it was saying you can do a hundred percent meals deduction if it is purchased from a restaurant. So, it used to be all meals were 50%, whether you bought it at a restaurant, whether you bought it from a convenience store if it was food or if it was snacks or something like that. But the intent was, all these jobs have been closed due to the pandemic. How can we help them? So, the thought was let's make business meals 100% deductible. If they are purchased from a restaurant. Anything in tax law, you have to go to the language, and you have to parcel out pretty much every single word to find out what a definition of what that is. So, the first thing I will always talk about with our clients is, well, it's a business meal, so what's a business meal? Well, a business meal is one that you have where I would say the intent is for the generation of revenue or education for your team. Where the primary purpose is business related. Now, obviously people can small talk before and after and things of that nature, but if its business related who should you have there? An applicant, an employee, a supplier? Then you also have to document about what was discussed at this meal. It's usually not very difficult to do that. I mean, a lot of times you can take a picture of the receipt and, you know, if you've got a receipt tracker, you can pretty easily write down and type your notes in for the purpose of the meal. But write a sentence. That's the first work you have to do to cover that. And then the next part is defining the restaurant. How do you define what a restaurant is? I'm going to read really quickly on how these things sound, but it's a business that prepares and sells food or beverages to retail customers for immediate consumption. Regardless of whether the food or beverages are consumed on the business prep premises. So, I think there's a couple items in here that are really important as we go through this one. It's a business that prepares and sells food. So, prepares kind of tells me that there's a kitchen involved or that it’s not prepackaged food. So that's excluding the grocery store, the convenience store. CVS, things of that nature because they're not preparing and selling there. The other word is retail. So, when I think of retail, I think that's being you and I coming off the street to be able to get the food. I think they say put retail in there. So once again, getting away from that prepackaged food. The other important one is whether or not you consumed on the business premises. So, you can eat it there or can carry it out or I could have it delivered. So that's another big thing. So, if you do door dash or other types of food delivery if they deliver it to me and if it's from the restaurant that still counts.
Tom Wadelton: So, with the pandemic delivery really fits within that definition a restaurant.
Dave Danic: That's correct. Another example. If you're traveling on business and you go out into a restaurant, that’s deductible. If you take some food from a convenience store and bring it back to your hotel room. Can you deduct that? Not 100% because it wasn't at the restaurant, but you do get the 50% because it was still a business meal. Cause you were traveling for business, but it just wasn't purchased from a restaurant. No gas stations, no convenience stores. If you're traveling and you want to pick up a bag of Skittles, that does not count. It inspires you to help out your local restaurants. Other items that we're seeing, we're a virtual remote company, we've seen a lot of office type environments kind of go away from the office. So, building that culture, a lot of people are starting to do more retreat style events. So how do we deduct the meals for that? I think there's still a lot of opportunity for companies and businesses to deduct meals and entertainment expenses for these retreats. So, for instance, our company is going to Vegas for our all company retreat, all employees are invited. So, I there's plenty of opportunities for us to deduct the food that will be at this retreat. But one thing I was thinking of was, okay, so what if we're in this conference room in Vegas and our first meal is a working lunch. I would say because it's a full retreat and it's for our convenience to keep working that lunch would qualify as a business meal. But the things I'm going to be looking at as the tax professional is, was it purchased from the restaurant? Or is it just catered in from a company? Is this a retail type environment? So those will be a consideration that we have to look at to see if it was a restaurant meal.
Tom Wadelton: Okay. So not yet decided whether we think that's 50% or a 100%. Is that right? You're looking to say, did it come from, for example, the downstairs restaurant? It sounds like it might be a 100% versus it's a totally separate kind of kitchen that just caters to events and they'll just bring in your food, but retail customers couldn't purchase that kind of food on property.
Dave Danic: Yeah. But as you can see, there's so many angles to look at to get full deduction on these.
Tom Wadelton: Yeah. I can see the logic there. And so when we're there in Vegas, some of the meals will actually be at restaurants. That sounds like an easy one. That could be an evening activity, something like a cocktail party where we've got a separate room and they're serving, does that also work?
Dave Danic: I would say yes. As long as the company focuses on making it a business purpose, in making sure business is discussed and documenting as such then yeah. Then I think you have a great opportunity for full deductions for retreats.
Tom Wadelton: Then there could be an entertainment portion, right? There are shows in Vegas and you could do a team event where everyone goes to a show that you need to purchase tickets for.
Dave Danic: Yeah if it’s entertainment related to the full team. So, like if I had a holiday party and invited a magician, I would certainly think that would be fully deductible. But if we’re going to a magic show, we have to buy tickets. Again, you’ll have to really determine how you link it to the business purpose for that event. The popular example is if I take a client to a baseball game or a show, the entertainment is now not deductible under some of those auspices. So, if I go to the football game, I can't deduct the tickets but if I have a separate receipt for the hot dog and pop and the pretzel that does count for a meal deduction. So, again, we're going to be very careful on how we document.
Tom Wadelton: Since you mentioned the baseball game, Dave, I've had a client say, so if I have baseball tickets and I want to give a ticket to an employee as recognition, how should I treat that?
Dave Danic: So it’s more of a gift?
Tom Wadelton: Right.
Dave Danic: You're starting to get to a level that's above a diminimous gift of some sort. So I would say that would be compensatory event. They aren't going for business reasons at that point, you know, it's just the employee and the partner. So I would say, you know, there isn't that other party there that would make it business related. So, I would think that would be okay. The company would get the deduction, but really, it's just because it had to be included in compensation for the employee.
Tom Wadelton: And for some owners when I've told them that they say, okay then I won't worry. I'd rather not cause a tax impact because you could say, well, then you could also gross up and you know, you could give Dave a $60 bonus and then say, here are these tickets. I'll give them the tickets. I just won't deduct it as to not turn it into a tax headache.
Dave Danic: Yeah. It's an administrative lift for the team. So, I think the last thing that I would look at is, I'm starting to get more questions on per diem rates. I want to cover that real quick. So, per diem is an amount that can be provided to an employee for business travel. There's no burden on the employee to keep providing receipts. They just need to prove that they were on a business trip if it comes down to it. So, depending on where they're going, the per diem rate changes. The company may want to start shying away from per diems for that because per diems are still only 50% deductible. So, I would encourage the company to do a direct expense for reimbursement. So, if the employee was at a business meal at a restaurant, I can still get the 100% deduction if I have the restaurant receipt for the business purpose and things like that. If I just had the per diem rate, then I can only do the 50%. Just measure how much meals are out there for your clients. If it's a small amount, they still might like the per diem, just so they don't have to do the whole receipt game. But if it is a significant part of your business, then you might want to explore saying, let's just go back to getting actual receipts and we might be able to get some higher levels of deductions.
Tom Wadelton: Yeah. That's good to know. I have one client that does construction projects. So when they do these, they all send a team of four or five people out for six or eight weeks. So that 50% could be a fair amount. I know they like for the employee, it's easier to say, I will give you $25 a day or $50 a day, then you don't have to capture receipts, but it could be that that's saying, okay, so for these trips, you know, in a year that's a few thousand dollars with a tax deduction that you're losing. Why don't we just go ahead and get the receipts to do that? So that'd be good to look at. I think of other companies where it may be occasional salespeople travel, but you know, a few days a year where you're probably looking and saying it's probably in the tens or maybe hundreds of dollars, maybe not worth. looking closely at
Dave Danic: Yeah. Just little items of discussion, right? We can look at this podcast a couple of ways, right? We can look at it from the tax professional and the client service angle where you can bring these types of options to clients. And if you're listening for tax savings, there's also the opportunity to say, okay, we can change our internal processes to save a little bit more or deduct. As a virtual CFO firm, that's kind of what we do for our clients. Looking at these opportunities and discussing that. I'm going to turn it to you, Tom, about our training program for CPAs?
Tom Wadelton: Yeah, we offer a course called The Virtual CFO Playbook. Many of the people who have taken this are tax professionals who want to change their business. Some say, I want to offer more advisory kinds of services. So, this playbook has 15 modules to walk someone through how Summit offers VCFO services. As you have said, we are primarily a virtual CFO service from. We do taxes. We do a great job of it, but we don't go out trying to just get people's tax returns. So, for those who want to change your business this course is worth checking out. There’s ongoing support. You can do a coaching session with one of our founders, Adam, and with me, we also have a weekly call. That's actually on Tuesdays where we get together and talk about progress and people can ask questions. So for someone who wanted to dive deeper into offering virtual CFO, the course is a really good option. You can find out more information at summitcpa.net/vcfo-playbook cpa.
Dave Danic: That’s how a lot of CPAs start off. You know, taxes are a kind of a low hanging fruit from a consultation perspective. However, I think a lot of people's tax clients who are listening on this podcast might want to get into more of a recurring revenue model, right? And we certainly feel like our playbook is a great way to get into that. So check it out.
Tom Wadelton: This is really helpful. I think you're demonstrating what I hope people are wanting to get from this is knowing that tax law is important but being able to explain it to people who are not tax professionals who want to give examples and kind of help people understand where some of those boundaries are I think is valuable. What I get from this is I can tell clients, hey, things have changed a little bit, and here's a couple of things you should consider.
Dave Danic: And then we're a CPA firm and we still have to look at this stuff as we were talking about with our retreats. How does our retreat fit within the tax law? And we'll have to deliberate internally to see how we want to treat some of these items. So, it's not easy.
Tom Wadelton: Even a tax firm that says I'm going to put tons of food in the office during busy season. That sounds like, from what you're saying, those are treated differently. Bringing food in the office to have it. There are chips and drinks and things that you wouldn't say are typical restaurant food. That's treated differently than buying dinner to be delivered at seven o'clock work.
Dave Danic: Yeah, the snack room, start thinking about where you're getting your snacks from, right? If you buy it from the grocery store it is 50%, deductible, but if you start getting some food from a restaurant and bringing it each day for people to eat in the break room, you may say hey, I read a this is 100% deductible because it's from a restaurant. So, just think about where you're buying your food from. Well, Tom, this was our inaugural podcast of the clear diagnostics podcast. We are going to spread the news and get people to recognize why it's called that.
Tom Wadelton: Yup. That's excellent. That's great. I look forward to doing more of these and we can only go up from here, right? It's got a
Dave Danic: Yep. Talk to you soon.