What's Your Meals and Entertainment Limit?

Have you ever entertained a client and heard the following: “Thanks for the dinner. I know it’s a write-off for you anyways!” Yes, this can be true, but that write-off has its limits and is not a dollar for dollar deduction.

A taxpayer's deduction for food or beverages or for business entertainment generally is limited to 50% of the otherwise qualifying expenses. Expenses subject to the 50% limit include not only the direct cost of the business entertainment (and meals consumed while away from home overnight on business), but also taxes, tips, and other related expenses (e.g., nightclub cover charges, and room rental for a cocktail party). The cost of transportation to and from the location of the business entertainment is, however, not subject to the 50% limit.

Ticket limitations. Generally, the deduction for a ticket to an entertainment event is limited to 50% of the ticket's face value, not 50% of its cost.
Thus, amounts in excess of face value paid to scalpers, ticket agencies or ticket brokers are nondeductible. Qualified charitable sports events are exempted from this face-value rule; in fact, the entire package cost of attending such events is exempted from the 50% limit on deductions. A sports event qualifies only if it is organized for the primary purpose of benefiting an exempt Code Sec. 501(c)(3) charity, the entire net proceeds are turned over to the charity, and the event uses volunteers to perform substantially all the event's work.

Skybox limitations. A taxpayer's deduction for a “skybox” or similar private luxury box leased for more than one sports event is limited to 50% of the sum of the face value of a non-luxury box seat ticket multiplied by the number of seats in the leased skybox. The excess cost of the skybox is nondeductible.

Certain meals can be exempt from the 50% limit. A number of expenses are exempted entirely from the 50% limit on deductions for meals and entertainment.

•Recreational expenses for employees. Expenses for recreational, social, or
similar activities (including facilities used for such purposes, such as health
clubs) are exempted if they are primarily for the benefit of employees, other than employees who are highly compensated individuals. This category covers items such as holiday meals, or an annual company picnic.

• Food and beverages excluded as de minimis fringes. Meals are not subject to the 50% limit if they are excludable from the recipient's income as a de minimis fringe benefit. The are three ways that meals may be excluded as de minimis fringes:
 Supper or supper money provided occasionally so that the employee can work overtime.
 Meals excluded from employees' income under Code Sec. 119 , i.e., provided on the employer's premises for the employer's convenience.
 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.

• Reimbursed meals consumed during job-related moves. 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.

To conclude our discussion on meals and entertainment, join us again next week as we take a look at the documentation you should have on file to support your expenses and their subsequent deduction.

Happy Valentine’s Day!

brad@mcarthurco.com
704.544.8429