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Tax & Assurance Guidance

Meal & Entertainment Expenses

Posted on October 18, 2013 by

Margaret Amsden

Margaret Amsden

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Follow these simple steps to safeguard your business against a possible encounter with the Internal Revenue Service.

If you happen to meet with clients over lunch at your favorite restaurant to discuss a new professional opportunity, or decide to entertain your clients by inviting them to watch a football game to strengthen your business relationship, you might be able to deduct some of the expenses. It is important to understand there is a thin line between certain expenditures that are deductible on your company’s tax return and other expenses that are not. Here are some ways to make sure your company’s assets are protected against the reach of the Internal Revenue Service:

Play it safe – be conservative and follow the regulations

  • In general, Code Section 162 provides a deduction for expenses which are:
    • directly related to the active conduct of trade or business; and
    • are ordinary and necessary
  • Code Section 274 then limits the deduction allowed for certain meal and entertainment expenses

Deductible Expenses

  • 50-percent Limitation
    • In general, under Code Section 274(n)(1), only 50 percent of the meal and entertainment expenses are allowable as deduction
    • Included in the costs permissible as 50-percent deductible are food or beverages and the related taxes, tips, room rentals, parking fees, entertainment tickets, etc.
  • Fully Deductible Expenses by Employer
    • Meals furnished on the business premises to more than one-half of all employees for the employer’s convenience
    • The costs of meal and entertainment that are treated as compensation to an employee on the employer’s tax return
    • The cost paid or reimbursed to an employee who is moving
    • Expenses for certain traditional social or recreational activities, such as holiday parties, for the benefit of employees
  • Deductible Expenses by Employees or Self-Employed Individuals
    • Reimbursement Not Subject to Withholding: When an employee’s or independent contractor’s business meal and entertainment expenses are reimbursed by the employer they are deductible by the employer, subject to the 50-percent limitation, if the reimbursements are treated as reimbursement not subject to withholding. The employee may claim the full reimbursed expenses as a deduction from gross income
    • Reimbursements treated as compensation subject to withholding: The employer may deduct the full amount and the employee or independent contractor is subject to the 50-percent limit

Non-Deductible Expenses

  • Dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or social purposes are not deductible (e.g. golf club memberships)
  • Expenses related to an entertainment facility are not deductible
  • Generally, the cost of entertainment for a spouse or for the spouse of a client cannot be deducted. However, such costs can be deducted if a clear business purpose, rather than a personal or social purpose, for providing the entertainment can be substantiated

Build up a solid defense by keeping detailed records and documentation

There are strict documentation rules for meal and entertainment expenses which must be proven by adequate records or other evidence. The following effective steps must be utilized in order for your business to comply with the documentation rules:

  • Keep all receipts related to the meal and entertainment expenses
  • Each individual expenditure must also be substantiated as to the amount, time, and place of the event, and business purpose.
  • The name and business relationship of the party being entertained must also be noted

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Margaret Amsden

Shareholder, Private Client Services

Margaret leads the firm’s private client services group as the point person for individual, estate and succession planning tax strategies.

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