Meal Expense – Navigating Between Internal Revenue Code Sections 162, 274, 132; IRS Technical Advice Memorandum 200030001; and, Churchill Downs v. Commissioner

As per usual I’m swimming in areas where the tax code is seemingly at odds. The latest matter across my desk regards meals and entertainment (M&E) expense. These are the two questions at hand:

  1. Specifically at what point does a meeting expense incurred under IRC section 162 to present a sales pitch to groups of prospective investors in which snacks and perhaps sandwiches are provided become a meal expense under IRC section 274 and thus limited to only 50% deduction? ANSWER – It depends.
  2. What if only 2 people show up for the presentation and the taxpayer buys them both dinner (under $25 each) to hear his pitch, could these meals potentially be considered a fully deductible gift to the prospective clients per IRC section 274(b)and a fully deductible de minimus fringe benefit to the Sales Rep under 132(a)(4)) ? ANSWER – It depends.

According to the IRS’ own Technical Advice Memorandum (200030001)certain costs associated with seminars and other meals provided at conferences attended by brokers who were independent contractors did not meet the de minimis requirements of IRC Sec. 274(n)(2).

According to the US Tax Court in Churchill Downs, Inc., the Tax Court denied the taxpayer a deduction for meals & entertainment because goods and services were provided to persons the taxpayer selected to entertain, rather than the general public, the 50% limitation was upheld.

Of course if you are reimbursed the expense is not deductible to you.

However for example if you are a ‘foodie’ with a profit motive (and a reported profit) you can indeed deduct in a fully beneficial means the costs associated with keeping current in your profession under a variety of provisions of the IRC.

Of course you need to be respectful of IRC Sec. 274(n)that for the most part only allows a deduction for only 50% of otherwise allowable meal and entertainment expenses.

The point is this is a hugely complicated matter to address as many taxpayers just don’t necessarily have it correct and it depends candidly on what you do and who you feed. Sometimes meals can be 100% deductible but mostly they are only 50% deductible unless exempted.

Navigating this quagmire is ultimately rooted in the documented substantiation or records you keep as well as the policies and procedures you have in place.

The proper application to the employer or the worker of this rule depends on whether the reimbursement or allowance is made under an accountable or a non accountable plan per [IRC Sec. 274(n)(2).

According to my friends at Parker Tax Publishing the following are 10 examples of expenses exempt from the 50% dis-allowance rule [IRC Sec. 274(n)(2)] which means that they are fully deductible:

  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 and thus subject to withholding for employees, or for which an independent contractor does not supply adequate substantiation. The 50% dis-allowance occurs at the employee/independent contractor level, and the employer can deduct 100%.
  3. Expenses paid by a taxpayer in connection with services performed under a reimbursement arrangement and the taxpayer properly substantiates his expenses to such other person [IRC Sec.274(e)(3)(B)].
  4. Expenses for meals and entertainment sold by the taxpayer for adequate compensation. This is a technical exception to prevent dis allowance of meals sold by a grocery stores and restaurants.
  5. Expenses for meals and entertainment that are included in the gross income of a non employee when a Form 1099-MISC is issued to the recipient
  6. Expenses excluded from gross income as a de minimis fringe benefit
  7. Expenses for tickets to fund-raising 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.
  8. Amounts for meals during a job-related move that are reimbursed and reported as income to the employee.
  9. Expenses for meals provided to crew members of a commercial vessel other than cruise ships, yachts, and similar type passenger vessels, if the meals are required by any federal law or would be required if the vessel was not operating on the Great Lakes, the Saint Lawrence Seaway, or an inland waterway of the U.S.
  10. 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 north latitude. Fashizzle!

Unless one of the below exceptions applies, 50% of all business meal expenses are disallowed, including those incurred while attending professional seminars and while traveling away from home. Tips and taxes on the meals are also included in the limitation.

  1. The deductible percentage of the cost of food and beverages consumed while away from home by individuals subject to the hours of service limitations of the Department of Transportation is 80%, not 50%.
  2. This rule applies to certain air transportation employees (pilots, crew, etc.), interstate truck operators and bus drivers, certain railroad employees, and certain merchant mariners.

If you’ve made it this far exactly what I have been able to effectively defend and even claw back on is a matter of personal conversation.