Business Meals and Entertainment Deductions

Because of changes over the years, it can be quite confusing determining what is deductible and by what percentage when it comes to meals and entertainment expenses for businesses. The Tax Cuts and Jobs Act (TCJA) enacted by Congress in 2018 made several significant changes to the deductions for meals, entertainment, and employee fringe benefits, including making business entertainment expenses entirely nondeductible. The Consolidated Appropriations Act (CAA) enacted in 2021, in an effort to support the restaurant industry impacted by the COVID-19 pandemic, allows businesses to deduct 100% for the costs of some meals provided by restaurants for the 2021 and 2022 calendar years.

After combing through many websites from CPAs, tax attorneys, and the IRS, I have attempted to put together this spreadsheet to make it easier to understand the rules.

In QuickBooks, I recommend creating at least three accounts in the Chart of Accounts: Meals (100%), Meals (50%), and Meals & Entertainment (non-deductible). When adding expenses, I also recommend always having a vendor (Restaurants instead of adding the name of every restaurant to the vendor list) and putting the name of the restaurant in the memo instead along with a description of the type of expense (what it was for). I use my Bookkeeping Client Portal, for capturing restaurant and other receipts and for pushing these expenses with their attachments into QuickBooks.

Year End Tasks You Should Be Doing Now in QuickBooks

As 2020 comes to a close, thankfully, now is the time to get a head start on organizing your books and closing out the year in QuickBooks.

Apply for PPP Loan Forgiveness

While it is still fuzzy as to the deductibility of expenses used in forgiveness of a PPP loan, borrowers who took PPP loans of $50,000 or less to pay for qualified expenses, such as payroll, mortgage interest payments, rent, and other eligible costs, can apply for total loan forgiveness now. The application is simpler and can be completed quickly.

Reconcile All Accounts in QuickBooks

Frequently put off, it is important that all accounts, not just bank and credit card accounts, are reconciled through at least the 3rd quarter. This includes loan and other long term liability accounts. Void any uncleared transactions. Contact vendors of any uncleared checks. Verify sales tax and payroll liability account balances are correct, as applicable. Reconciliations confirm that what is in QuickBooks matches what has happened dollar for dollar in real life.

Check Financial Statements

Create a Profit and Loss statement on an accrual basis. Even if you file on a cash basis, this will ensure that you aren’t missing any transactions that may have been miscategorized or duplicated. Also create a Balance Sheet and check for accounts that don’t have normal balances, such as negative expenses, liabilities, or assets. If you use subaccounts, make sure that there are no balances in the parent account. In QuickBooks desktop, this will appear as Account - Other.

Run Other Reports

Create a Custom Transaction Detail Report (desktop) or Transaction List by Date (QBO) and group by Name (Payee) and filter for expense type transactions. If all expenses have a payee or vendor name (recommended), then verify the split or category is consistent for each name, as applicable. In QuickBooks Online, navigate to Expenses and make sure all transactions have attachments (recommended). I use Receipt Bank to streamline this process.

Write Off Bad Debt

Run an A/R Aging Summary report. Attempt to collect on any balances over 90 days past due. If uncollectible, create credit memos to a Bad Debt item posting to a bad debt expense account and apply to overdue invoices.

Evaluate Business Performance and Processes

Run the Business or Company Snapshot. Compare previous year to current year income and expenses. Determine if switching to a better payroll service would benefit the company. Investigate apps to eliminate duplicate entry or to improve efficiency. Hire a ProAdvisor if you can’t do all this yourself and need help.

How Do You Know If Your QuickBooks Financial Statements Are Correct?

Before sending your Profit & Loss and/or Balance Sheet reports from QuickBooks to your tax preparer or before you file your taxes yourself, you may want to continue reading. 

There are several litmus tests to confirm that what is in your QuickBooks is correct and that your financial statements reflect this.

If you invoice (use Accounts Receivable) your customers out of QuickBooks, then you may want to make sure that the Total Income on your Profit & Loss report on an accrual basis matches your Sales by Customer Summary report.

Sales (Income) should be reflected with transactions only such as invoices, sales receipts, credit memos, and refund receipts (QuickBooks Online only), not using deposits to income or journal entries. To find out where the discrepancy lies, run a profit and loss report by customer or job and compare with the sales by customer summary report totals for each.

Fortunately, QuickBooks Online includes a Not Specified column to make this easier to find.

The culprit: 2 transactions, expenses, that were coded to income accounts.

This is another scenario in Quickbooks Desktop.

In comparing the reports, we find that the dollar amount discrepancy shows up for a Cost of Goods Sold account. Upon further drilling down, an invoice was used, but the item was not set up with an income account.

Once the item is fixed to either an income account or as two-sided (check box above Description checked), this fixes the reports and financial statements.

In my next post, I will show another test, so please subscribe below to get notifications to my blog. Thanks!