100% Deductible Meals & EntertainmentMs. Greta P. Hicks
July 17, 2013 — 18,458 views
Under Section 274(a)(1)(A) of the Internal Revenue Code (IRC) and Treas. Reg. Sec. 1.274-5(b)4, no deduction is allowed unless business is discussed during, or directly before or after the meal.
IRC Sec. 274(n) allows a deduction for only 50% of otherwise allowable meal and entertainment expenses. This reduction applies to any expense for food or beverages, and any item for entertainment, amusement, or recreation, or for a facility used for such an activity. ( Code Sec. 274(n)(1) ) However, there are several exceptions to the 50% disallowance rules.
Example: X markets and sells real property near A to residents of B. X acts as a broker for the owners of the real property and receives commissions based upon sales. X uses telemarketing to reach likely purchasers. It selects potential purchasers from residents of B who enter drawings for free trips to such locations as C and A. These drawings are generally held at trade shows, conventions, or B’s state fair. X does not engage in any other for of advertising.
In order to attract purchasers, X for the past several hears has provided attendees with free dinners prior to the sales presentation. The dinners are provided free of charges regardless of whether the attendees actually purchase any property. The attendees, however, must stay for the presentation. No owners or employees of X receive a dinner in connection with the presentation.
Question: Are the meals subject to the 50% reduction stated in IRC Sec. 274(n)?
No. Private Letter Ruling No. 9414040, states “that the cost of meals served to potential customers of X prior to the sales presentation is not subject to the 80 percent (now 50%) limitation rule provided in Sec. 274(n). In part, IRC Sec. 274(e)(7) provides that subsection (a) shall not apply to any expenses for goods, services, and facilities made available by the taxpayer to the “general public.” Also, IRC Sec. 274(n)(1) shall not apply to any expense if such expense is described in Sec. 274(e)(2), (4), (7), (8), or (9).”
SUMMARY OF EXCEPTIONS TO SEC. 274(a)
Sec. 274(e)(2), Expenses treated as compensation. Expenses treated as compensation paid to an employee or otherwise included in the gross income of the recipient of the meal or entertainment. Example: An employer may fully deduct its reimbursement of meals consumed by an employee during a job-related move. The reimbursement is included in the employee's income and isn't deductible as a moving expense. Code Sec. 217(b)(1) and Sec. 82.
This section also includes meals when the meal is the nature of a tax-free fringe benefit under Code Sec. 132(e). Other exceptions include:
- An employer-operated eating facility is a de minimis fringe if it is located on or near the employer's business premises, and its revenue normally equals or exceeds its direct operating costs.
- An employer may fully deduct the cost of supplying on-premises meals if the meals are tax-free to employees under Code Sec. 119.
- Supper or supper money provided occasionally so that the employee can work overtime.
- Food or beverage expenses of crews of certain drilling rigs and crews of certain commercial vessels but not fishing vessels.
- Traditional recreational expenses for employees.
Sec. 274(e)(1), Food and beverages for employees. Expenses for food and beverages (and facilities used in connection therewith) furnished on the business premises of the taxpayer primarily for his employees. Example: Coffee and other free beverages.
Section 274(e)(3), Reimbursed expenses. If the accountable plan requirements are met, the employee can fully exclude the reimbursement for his or her own meal or entertainment. It is the employer who can only deduct 50% of the meal's cost under Sec. 274(n) and Reg. § 1.62-2(h)(1). NOTE: The deductible percentage of meals for certain transport workers (e.g., air transport employees, truck and bus drivers, railroad employees) while away from home during or incident to the period of duty subject to the hours of service limitations of the Dept. of Transportation is 80% versus 50%.
Sec. 274(e)(4), Recreational, etc., expenses for employees. Entertainment-type rewards, such as, occasionally give out theater or sporting event tickets are all tax free de minimis fringe benefits, Reg. § 1.132-6(e)(1). Example: Items such as holiday meals, or an annual company picnic and extends to expenses for recreational, social, or similar activities (including health clubs) are exempted if they are primarily for the benefit of employees, other than employees who are highly compensated individuals within the meaning of Code Sec. 414(q).
Sec. 274(e)(5), Employee, stockholder, etc., business meetings. Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors.
Sec. 274(e)(6), Meetings of business leagues, etc. Expenses directly related and necessary to attendance at a business meeting or convention of any organization described in section 501(c)(6) (relating to business leagues, chambers of commerce, real estate boards, and boards of trade) and exempt from taxation under section 501(a) .
Section 274(e)(7), Items available to public. Expenses for goods, services, and facilities made available by the taxpayer to the general public.
Sec. 274(e)(8), Entertainment sold to customers. Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money's worth. Example: Cost of meals sold by a restaurant or daycare provider.
Sec. 274(e)(9), Expenses includible in income of persons who are not employees. Expenses paid or incurred by the taxpayer for goods, services, and facilities to the extent that the expenses are includible in the gross income of a recipient of the entertainment, amusement, or recreation who is not an employee of the taxpayer as compensation for services rendered or as a prize or award under Sec. 74 .
CHECK OUT the exceptions to the 50% meals and entertainment rules of 274(a) by reading 274(e) and 274(n). Next, set up the general ledger to capture the various exceptions to the 50% disallowance rules of Sec. 274(a). Note: The record keeping rules of Sec. 274 remain necessary.
Ms. Greta P. Hicks
Greta P Hicks CPA
Greta P Hicks is a former IRS Examination manager and Ms Hicks currently serves on the Editorial Board of the Texas Society of CPAs and is Tax Editor of Today’s CPA. Greta is active on the TSCPA IRS Relations Committee and teaches seminars on IRS.