Beginning in 2018 Entertainment is no longer deductible but business meals are still 50% deductible. Most clients are aware of the tax rule that disallows 50% of their business meals. What is not nearly as widely known is that there are ten exceptions to this 50% disallowance rule. When one of these exceptions applies, you get a 100% deduction for the business meal expense.
1. Meals Served on the Employer’s Premises
An employer may provide employees with meals at work and claim a full deduction without the employees having to report the value of the meals in their income. The key is the meals have to be provided (a) for a valid business reason, (b) on or near your businesses premises, and (c) primarily for the convenience of the employer rather than merely as an added fringe benefit for employees. An example would be a hospital providing meals to hospital staff so they are nearby if a patient needs immediate care.2. Employee’s reimbursed expenses
If you are an employee, you are not subject to the 50% limit on expenses for which your employer reimburses you under an accountable plan. The employer can deduct the expenses although it is subject to the 50% limit.
3. Reimbursed Expenses Treated as Compensation to the Employee
If the employer does not have an accountable plan and the employer includes the reimbursed expenses in the employee’s wages the expenses are not subject to the 50% limit for the employer. A reimbursement or expense allowance arrangement is an “accountable plan” if it satisfies the requirements of business connection, substantiation, and requires the employee to return amounts in excess of the substantiated expenses.
4. Meals and Entertainment Expenses for Employees
Employers can deduct the full cost of providing food and beverages at recreational, social, or entertainment gatherings primarily for the benefit of rank and file employees. Examples include company golf outings, Christmas parties, or other gathering for employees and their guests.
5. Items Available to the Public
Expenses incurred for meals available to the general public are 100% deductible. Examples include free food at concerts hosted by a Cable Company, free dinners for potential restaurant customers, free hot dogs at a Furniture store promotion, free wine and food at an exhibition sponsored by a winery, and free brownies furnished by a realtor at an open house.
6. Meals and Entertainment Sold to Customers
When services are provided to a client the service provider can deduct 100% of job-related meal and entertainment expenses by billing the client separately for these costs. However the client is then stuck with the 50% disallowance limit. If separate billing doesn’t occur, the 50% disallowance rule applies to the service provider. For example, many of our clients adequately account for meal and entertainment expenses to a client who reimburses them for these expenses. They are not subject to the directly-related or associated test, nor are they subject to the 50% limit. If the client can deduct the expenses, that client is subject to the 50% limit.
7. Sale of meals or entertainment to the Public
You are not subject to the 50% limit if you actually sell meals, entertainment and services. For example, if you run a nightclub, your expense for the food and entertainment you furnish to your customers is not subject to the 50% limit.
8. Meals Provided to Raise money for Charity Through Sports Events
The allowable deduction for the cost of a ticket to a qualifying charity sports event isn’t reduced by the 50% meal disallowance rule even when meals are included. The ticket package must include admission to the event, but it can also include meals and refreshments. To qualify, the charitable event must give 100% of its net proceeds to a charity and use volunteers to do almost all the work. The classic example is a charity golf tournament with a meal included in the deal.
9. Meeting of Business Leagues Exempt under Internal Revenue Code Section 501(c)(6)
Section 501(c)(6) of the Internal Revenue Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit to deduct the entire cost of meals provided to members at meetings.
10. Department of Transportation Hours of Service Limitations are 80% Deductible
In lieu of the regular 50% disallowance, individuals whose work is subject to the hours of service limitations of the Department of Transportation (e.g., interstate truck drivers, certain air transportation employees, certain railroad employees) can deduct 80% of their business food and beverage expenses.
As you can see, there are enough exceptions to the 50% disallowance rule that most businesses can meet at least one, if not more of them. If you have any questions please contact Gregory J. Spadea at (610) 521-0604.
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