The federal tax code allows businesses to deduct legitimate expenses from income before imposing an income tax on earnings. Your board of directors helps run your company, so many of the expenses incurred by board members individually and the board as a unit when conducting business will be deductible. Properly classifying those expenses and keeping detailed records that will satisfy an audit also affect whether the IRS will ultimately allow those deductions.
The IRS lets businesses deduct ordinary and necessary costs of doing business from income to arrive at an amount that the agency will tax. All corporations are required by state laws to maintain a board of directors, and most states require the board to meet at least once a year. State laws also require board members to actively oversee management and allow the corporation's bylaws to define and expand the individual roles of directors. The expenses associated with the operation of a board of directors clearly qualify as ordinary and necessary costs of doing business under IRS rules.
Types of Expenses
To be deductible, board expenses must have clear connections to business purposes. Travel expenses to and from board meetings, compensation for services, supply purchases, costs for hotel stays, meal expenses and more can be written off against business income, provided the purpose for the expense was 100 percent business-related. Expenses that board members incur that are related to personal matters can't be deducted from business income. If an expense, such as a cell phone bill, reflects both business and personal use, the IRS requires taxpayers to deduct only the portion of the expense that is attributable to business use.
The corporation is responsible for proving that a board expense that was deducted from income was a legitimate business expense. Corporations often adopt a board of directors expense policy to set a procedure for documenting expenses that includes submitting receipts, keeping travel logs and filling out reimbursement forms. The IRS accepts many forms of proof that establish the nature of the expense, but creating a standardized recordkeeping system makes it easier to handle IRS inquiries. The agency can disallow a business expense after the corporation files its taxes if the company doesn't have proof to support the deduction.
Correctly classifying board expenses helps your business withstand IRS scrutiny. Expenses are generally grouped into categories such as travel-related, dining and entertainment expenses. Most categories have IRS caveats, such as allowing a 100 percent deduction for travel expenses outside of a person's normal commute, but allowing only a 50 percent deduction for meals and entertainment. Work with a qualified accountant to correctly identify, track, classify and deduct board expenses.
- Internal Revenue Service: Deducting Business Expenses
- Internal Revenue Service: Publication 535 -- Business Expenses
- UPS Upside: 5 Hot Small-Business Tax Deductions to Consider Before you File
- Securities and Corporate Governance Group: Reimbursing Director Expenses -- What’s the Plan?
- Inc.: Keeping Business Records for Tax Purposes
- Cengage Learning: Revised Model Business Corporation Act (Excerpts)
Terry Masters has been writing for law firms, corporations and nonprofit organizations since 1995. Her online articles specialize in legal, business and finance topics. She holds a Juris Doctor and a Bachelor of Science in business administration with a minor in finance.