IRC Section 274(a)(1) states that no deduction is allowed for expenses associated with “entertainment, amusement or recreation,” unless the taxpayer can support that the expenditure was directly related to a bona fide business discussion, business meeting or business convention.
IRC Section 274(d) and Treas. Reg. Section 1.274-5 also provide for full disallowance of meals, entertainment and lodging expenses unless the taxpayer documents for each expenditure in excess of $75:
- The time and place of the meal, entertainment, etc.,
- The business purpose and the amount of expense,
- The business relationships of the various parties in attendance.
IRC Section 274(a)(2) and Treas. Reg. Section 1.274-2(a)(2) adds that no tax deduction will generally be allowed for membership payments for club dues, including dues to clubs organized for “business, pleasure, recreation or other social purpose.” This regulation applies to country club dues, health clubs and pure social clubs. Treas. Reg. Section 1.274-2(a)(2)(iii)(b) carves out exceptions for full deductibility in those cases in which a taxpayer pays membership or ongoing dues to: “business leagues, trade associations, chambers of commerce, boards of trade, real estate boards, professional organizations and civic or public service organizations.”
Fifty Percent Meals and Entertainment Add-Back
IRC Section 274(n) applies a general 50-percent limitation on the deductible portion of “business related” meals and entertainment (other than the primarily non-deductible skybox expenditures and “event” tickets purchased at prices above the “face” amount on the ticket — IRC Section 274 (l)(2) and 275 (l)(1), respectively.
Interestingly, Form 1120, Page 5, Schedule M-1, Line 5.c. lists the 50-percent taxable income add-back as “Travel & Entertainment” vs. “Meals & Entertainment,” further adding to the general taxpayer confusion as to which expenses are non-deductible, 50 percent deductible or fully deductible. Note: Lodging is generally fully deductible, with the exception of certain foreign or most cruise-based conventions/meetings [see IRC Section 274(h)].
Specific Exceptions Allowing Full Deductibility
IRC Section 274(e) and (n) provide a number of situations in which the 50 percent tax deduction scale-back will not be required. Following are the major exceptions that will allow the taxpayer to claim the full deduction:
- De Minimis Fringe Benefit Amounts — Meals, entertainment and other employer-provided benefits that are relatively minor and difficult to track.
- Charitable-Sponsored Sporting Events — Tickets or packages involving sporting events in which the proceeds are payable to a registered charity and the event is staffed primarily by volunteers.
- Employee Compensation Amounts — When employers report the meal or entertainment expenditure as W-2 income to employees other than “insiders,” the amount will be deemed fully deductible. For example a team-building fishing lodge trip reportable to the participating employees will generally be fully deductible.
- Reimbursed Expenses — When a corporation incurs such expenses on behalf of a client or customer and there is an adequate accounting of such expenditures, such expenses will generally be fully deductible.
- Meetings of Business Leagues, etc. — Costs other than meals that are still limited to 50 percent and are associated with various IRC 501 organizations, such as Rotary, Kiwanis, Chamber of Commerce and others.
- Items Available to the Public or Sold to Customers — These include trade-show costs, receptions among other events that are open to the general public or seminars, conferences, entertainment and such events that are open to the general public.
- Meals Provided to Certain Employees Working at Remote Locations — This would include oil platforms, vessels and certain long-haul truckers.
Due to the lack of detailed accounting for myriad of business expenditure types, many taxpayers and CPAs simply end up adding back 50 percent of ALL meals and entertainment expenses for simplicity.
Per Diem Meals and Lodging Allowances
For those businesses that prefer to further minimize the documentation process, rather than using an accountable plan for employees’ local and out-of-town travel, employers may opt to use the IRS issued Per-Diem/Daily Meals and Lodging Allowance guidelines. Per-Diem rates generally eliminate the need for detailed employee reporting.
The Per-Diem Meals and Lodging allowances vary with location and sometimes with the time of the year. For 2011, the highest lodging rate is for New York City at $269 per day and the lowest IRS rate is $77 per day. The daily meal rate allowances range from $46 per day in many rural locations to $71 per day in many urban locations.
Source: Blake Christian, CPA, MBT is a tax partner with Holthouse, Carlin & Van Trigt LLP and Co-Founder of National Tax Credit Group, Inc. He can be reached at (562) 216-1800.