Deductible Expenses

How do clubs deal with sharing costs for dinners? We meet at a local University Faculty Club (not trendy but quite a lift to the ego) and have dinner. The cost is upwards of $50.00 per person; attendance is usually 50-75%. Aside from pure waste of capital and weight gain issues, how should this be managed and accounted for? For many years we "wrote it off" as an investment expense. But I can clearly see from your writing that this should not continue.

- Jon B. (Treasurer in trouble...)

Dear Jon:

It's gratifying to see my years of diligent study and training in investment-clubology finally showing results! As you have learned, feeding your members during meetings is not what the IRS considers a deductible expense, no matter how indispensable your club may find the practice. (Making investing decisions on an empty stomach is never recommended.)

While the cost of meals should never be considered a deductible investment expense on your club's books, there's no problem with paying for them from your club account--if you're using NAIC Online Club Accounting or NAIC Club Accounting for Windows version 2.0. In these programs, you can make an expense "deductible"`or "non-deductible", depending on whether it comes under the definition of an allowable club expense as determined by the IRS. (See IRS Publication 550 for complete rules on deductible investment expenses.) Alternately, you could use the petty cash account, allowing members to pay in additional cash to cover the costs of food at your meetings, and then paying out the expense from petty cash.

Now, your club has another problem--no, not with their waistlines--but with your tax returns to the IRS and your year-end member distributions. Since you've improperly recorded an investment expense, and then reported that to the IRS, the IRS expects you to file an amended return. But I'm a club therapist, not an accountant, so I'm not able to give you any specific tax advice or even tell you whether or not filing an amended return is necessary. (Try emailing ICLUBcentral tax experts Jerry Dressel or Rip West.)

I will, however, use this opportunity to make a point about investment expenses in general. While it's true that the IRS does categorize some expenses as "deductible," for most clubs and individuals, this is completely irrelevant. That's because investment expenses are only deductible to the extent that they exceed 2% of your Adjusted Gross Income (AGI). If your AGI is $45,000, the first $900 (2% of $45,000) of deductible investment expenses in that year have no impact on your individual tax returns. Any investment expenses in excess of that first $900 do reduce your taxable income--if you have $1200 in allowable expenses, then only $300 is deductible.

While I can see how a person might spend $900 or $1200 a year in managing their portfolio (considering all the pricey software and data subscriptions and newsletters and advisory services that are out there) it's very hard for me to imagine that anyone who spends that much is seeing enough of a return to justify those costs.

My prescription: keep expenses to an absolute minimum, and don't be lulled by the notion of a "deductible" investment expense to rationalize spending money unnecessarily.

- Doug