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Reel in maximum deductions at your summer hideaway

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in Small Business Tax,Small Business Tax Deduction Strategies

Does your company own a retreat in the woods or by the water? Unfortunately, you usually can’t deduct the costs of maintaining this “entertainment facility,” even if you use it to entertain business clients.

Strategy: If it suits your needs, allow rank-and-file employees to use the place, too. As long as it is used primarily by your employees, the general rule barring deductions doesn’t apply.

As a result, your company is in line for big deductions for depreciation or rent, upkeep, insurance, etc.

Here’s the whole story: The definition of an entertainment facility covers any property that you own, rent or use for entertainment. This includes yachts, hunting lodges, fishing camps, tennis courts, bowling alleys, cars, airplanes, apartments, hotel suites and vacation homes.

Whether or not a facility is used primarily by employees depends on the number of “employee use” days versus days of use for other purposes. In other words, if the place is used by employees more than 50% of the total days it is used, you’re in the clear. Also, this enables you to claim deductions for the days the facility is used to entertain business clients—even if it’s just for goodwill.

Caveat: You must make the facility available to all employees. It can’t be limited to just officers or a select group of workers.

Example: Your company owns a lodge with a swimming pool and tennis courts. The place is used a total of 100 days during the year. For 35 days, you use the lodge to entertain clients and your family spends 10 days out of the year there. Company employees use it the remaining 55 days.

On these facts, the lodge is used primarily by employees (55 days out of 100). Since the business use of the lodge is 90%, your company can write off 90% of the depreciation and other qualified expenses.

This is an all-or-nothing proposition. If the facility isn’t used primarily by employees, you get zero tax benefit for it.

Let’s go back to our previous example but change the facts a little. Suppose that your employees use the facility for 45 days, while your family uses it for 30 days and you entertain business clients there 25 days. In this case, there’s no tax deduction for the facility. You can’t even write off the cost attributable to your employees’ use.

However, all is not lost. Even if you’re not entitled to deductions for the facility per se, you still may be able to write off costs of entertaining business clients at the place following or preceding a “substantial business discussion” (see box).

What about your employees? As a general rule, the value of the use of the company’s lodge is treated as a tax-free fringe benefit.

Tip: Keep detailed records to back up your claims of use by employees.

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