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FAQ: To What Extent are Business Meals Deductible?

August 15, 2013

Cynthia J. Teixeira, CPA, MS
Manager

A business can deduct meals only if they are ordinary and necessary expenses and not lavish or extravagant. Further, the amount allowable as a deduction for business meal and entertainment expenses, whether incurred in-town or out-of-town is generally limited to 50 percent of the expense.

Related expenses, such as taxes, tips and parking fees must be included in the total expenses before applying the 50 percent reduction. The 50-percent reduction is made only after determining the amount of the otherwise allowable deduction. However, allowable deductions for transportation costs to and from a business meal are not reduced.

The 50 percent limitation also applies to meals and entertainment expenses that are reimbursed under an accountable plan to a taxpayer's employees. In that case, it doesn't matter if the taxpayer reimburses the employees for 100 percent of the expenses.

Exemptions to Entertainment Expenses

The general rule under IRC Sec. 274(n) is that only 50 percent of meal and entertainment expenses are allowed as a deduction unless an exemption applies.  The following expenses are exempt from the 50 percent disallowance rule:

  1. Expenses treated by an employer as compensation to an employee who is a recipient of the meals or entertainment when such compensation is subject to normal withholding.
  2. Reimbursements reported as compensation (subject to withholding for employees).
  3. Expenses paid by a taxpayer (employee or independent contractor) in connection with services performed by him for a person (other than his employer) under a reimbursement arrangement, and the taxpayer properly substantiates his expenses to such other person.
  4. Expenses related to recreational, social or similar activities incurred primarily for the benefit of employees other than highly compensated employees (e.g., food and beverage provided by the employer at a company picnic).
  5. Expenses for items made available to the general public (e.g., promotional popcorn or snacks at a car dealership or meals preceding a sales presentation to potential customers).
  6. Expenses for meals and entertainment sold by the taxpayer for adequate compensation.
  7. Expenses for meals and entertainment that are includable in the gross income of a non-employee when a Form 1099-MISC is issued to the recipient.
  8. Expenses excludable from gross income as a de minimis fringe benefit (see below).
  9. Expenses for tickets to fundraising charitable sporting events if the event is organized for the purpose of benefiting a Section 501(c)(3) organization. 100% of the net proceeds are contributed to the organization, and volunteers are used for substantially all the work in staging the event.
  10. Amounts for meals during a job-related move that are reimbursed and reported as income to the employee.
  11. Expenses for meals provided to crew members of a commercial vessel (other than cruise ships, yachts and similar type passenger vessels).
  12. Expenses for meals provided on offshore oil and gas platforms or drilling rigs or on a platform or drilling rig (or related support camp) located in the United States north of 54 degrees latitude.

De Minimis Fringe.  If the value of any property or service provided to an employee is so minimal that accounting for the property or service would be unreasonable or administratively impracticable, it is a de minimis fringe benefit that is excluded for income and employment tax purposes.  Such benefits that are food related may include occasional parties or picnics, occasional dinner cost due to overtime work and employer-furnished coffee and doughnuts.

A subsidized eating facility can be a de minimis fringe if it is located on or near the business premises and the revenue derived from it normally equals or exceeds direct operating costs. Further, if more than half of the employees are furnished meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. Therefore, the meals are fully deductible by the employer, instead of possibly being subject to the 50 percent limit on business meal deductions, and excludable by the employees.

Disclaimer: Under U.S. Treasury Department guidelines, we hereby inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service (or state and local or other tax authorities), and (2) no part of any tax advice contained in this communication is intended to be used, and cannot be used, by any party to promote, market or recommend any transaction or tax-related matter(s) addressed herein without the express and written consent of Blum, Shapiro & Company, P.C.
 

 

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