Yes, coffee can be written off as a business expense but it will depend on some very crucial factors. Tax deductible business expenses are almost any “ordinary, necessary, and reasonable” expenses that help to earn business income. Deductible expenses are those that can be subtracted from a company’s income before it is subject to taxation.
Tracking business expenses is imperative when a business wants to deduct those expenses from gross income on tax returns or profit and loss reports. In the United States, business owners can deduct many expenses, although not every expense applies to every business. For business expenses that are eligible for deduction, the business will have to implement expense categories in accounting files or bookkeeping software to easily tally year-end totals.
Agreeably, coffee and the workplace tend to go hand-in-hand. From maybe factory workers enjoying espresso during their breaks, to espresso for employees to easily get their caffeine, or maybe to the endless pod-coffee makers in offices today, business executives now understand that coffee is a crucial investment to boost employee morale and productivity.
Coffee falls under a category of compensation called de minimis (minimal) benefits. It is a classification of fringe benefits that include other things like occasional office parties, small gifts, and other minor expenditures– all of which are normally able to be claimed as business expense deductions.
For businesses in the United States, a meal or entertainment expense can mean different things. This type of expense can include activities like, dinners, lunches, drinks after work, coffees, going to a live performance, the opera, ballet, sporting event, office Christmas party, etc.
However, for anything to be a deductible business expense, the cost needs to have been incurred as a business expense. Have it in mind that your daily coffee from Starbucks cannot be considered a business expense on its own. If you are convinced that it is a business expense, you will need to prove why that is.
The answer of whether or not the coffee in your workplace is a business expense comes down to how you provide the coffee, who it’s for, and what its purpose is. Below are a few factors that will help you determine if your coffee expenses can be regarded as business expenses and deductible from your tax returns.
3 Factors That Will Determine If Your Coffee Qualifies as a Business Expenses
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1. Coffee Amount
The value of the coffee you are providing to your workers is expected not to represent a meaningful percentage of their overall compensation. By doing so, you can claim the coffee you’ve provided to your employees as being ‘administratively impractical’ to account for.
Note that although this may seem a little vague, it is absolutely imperative to your ability to claim a deduction based on the cost of the coffee. Once the coffee could be viewed as a meaningful percentage of compensation, it would be taxable as an in-kind benefit. And though the office coffee will definitely be kind, and certainly a benefit, nobody should be paying unnecessary taxes on their morning coffee.
2. Business-Related Purpose
For coffee to be regarded as a business expense, the purpose of the coffee has to be business related. This means that the coffee provided in the office has to be freely available to all employees, without regards to seniority. Or, if you’re getting coffee outside of the office, it is expected to be done with a client or colleague for it to be considered a legitimate business purpose.
3. Itemized Receipts
If you follow the above rules you’ll likely be able to deduct coffee machines, the coffee itself and related equipment and supplies. But for any coffee outside the office to be regarded as a business expense, you’ll need both itemized receipts and record of the relevant business purpose legitimizing the deduction.
Other Things That Can Be Considered Business Expenses Aside Coffee
Have it in mind that all deductions can be disallowed for even legitimate business expenses if those expenditures are not adequately supported by business records. Some of the major things that can be termed business expenses are described below:
i. General and Administrative Expenses
General and administrative expenses are related to keeping the business moving. For a business with a physical location, this includes rent. For a home-based business, this expense may include a percentage of the house used exclusively for business. Utilities, phone and internet services are part of administrative expenses, as are website domain and hosting costs.
ii. Equipment, Materials and Supplies
Have it in that even the most streamlined internet seller needs supplies and equipment to run a business. These business expense include but aren’t limited to computers and printers, copiers, fax machines, and equipment required for technical needs.
For instance, a welder has tools and equipment necessary to do his job with materials that include the wire for soldering. This expense also includes paper, pens and everything else needed to conduct daily business operations. These usually are replenished regularly – just think of all the things you purchase at the office supply store.
iii. Marketing and Advertising
In the United States, a business can refer to costs associated with marketing and advertising as business expenses deductible from tax returns. These are the hard costs of print or digital ads. However, these expenses go beyond hard costs and include design services and purchased artwork. Business cards, flyers and catalogues are also part of marketing and advertising costs.
According to Section 179 of the Internal Revenue Code, small business owners can write off the first $18,000 of equipment purchased for business use each year during the year in which it was purchased. Sometimes, it makes sense to take advantage of this tax break immediately, particularly if purchases will be fairly regular from year to year.
If the item is a one-time purchase or if the total amount spent is greater than the limit, the business owner may choose to depreciate the cost over future time periods. Depreciation is a tax-deductible business expense.
The IRS applies different “life spans” to different types of equipment for the purposes of depreciation. For example, it applies a five-year life to telecommunications equipment and automobiles, and a seven-year life to computers and office equipment like desks, chairs, and fixtures.
v. Entertainment and Travel
Very necessary travel and entertainment costs are termed business expenses if they are: 1) directly related to business, meaning that business took place or was discussed during the entertainment; or 2) associated with business, meaning that business took place or was discussed immediately before or after the entertainment (i.e., a small business owner took a client out to dinner or to a sporting event following a meeting).
Especially because they include a personal element, only 50 percent of meals and entertainment expenses are deductible as business expenses. Business-related travel, however, is fully deductible.
However, note that adequate records are crucial to substantiate the deductions. For business-related meals and entertainment, these records should include the amount, place, date, and reason for entertainment, nature of business discussion, and name and occupation of the person being entertained.
The costs of reasonable and necessary business travel are fully deductible as business expenses. The costs that can be deducted include airfare, bus or train fare, car rental, and taxi fare, hotels and meals, and incidentals such as tips and dry cleaning expenses.
vi. Employee Benefits
Note that the cost of providing employees with a wide variety of fringe benefits is considered a business expense. Most of these benefits are not considered income for employees, so they receive a tax break as well.
Some types of benefits—particularly retirement and pension plans—are also deductible for self-employed persons and small business owners. Nonetheless, it is very crucial to keep up with the rapidly changing tax laws regarding these matters.
Some of the types of employee benefits that may be considered tax deductible business expenses include: retirement plans, health insurance, disability and life insurance, company cars, membership in clubs and athletic facilities, dependent care assistance, education assistance, employee discounts, and business meals, travel, and lodging.
When trying to consider if coffee or any other expense can be considered a business expense, do not base your information entirely on the wisdom of the Internet. If you want to know more on IRS regulations surrounding fringe benefits, including coffee, you can do so by seeking the advice of a licensed professional.