Description
Insight Article
Meals and Entertainment Deductions
By Kim Massopust, CPA, Tax Manager
January 2016
Are you making the most of your meals and entertainment
deductions? Whether you look at the 50 percent meals and
entertainment limitation as the glass being half full or half empty, it is
important to remember that the glass can be full as well! There are
several exceptions that allow you to deduct 100 percent of certain
meals and entertainment (M&E) expenses.
General Rule
Internal Revenue Code Section 274(n) limits most M&E expenses to
a 50 percent deduction. This limitation is based on the premise that
most entertainment expenses typically have both a business and a
personal element to them. Under Section 162, ordinary and
necessary expenses paid or incurred in a trade or business are
generally deductible, while deductions for personal expenses are
disallowed. In order for an M&E expense to be tax deductible, it first
must meet the following three criteria:
1.
Directly related to the active conduct of a trade or business. 2. Ordinary and necessary (not lavish or extravagant). 3. Properly substantiated. Once the above criteria are met, the expense is then generally subject to the 50 percent limitation referenced above.
While that is the general rule, this article will focus on the opportunity involved with expenses that can be deducted in full. Exceptions to the 50 Percent Limit There are a number of exceptions to the rules laid out by Section 274(n). It is important for banks to note not only that these exceptions exist, but also how to track these expenses separately so that full advantage can be taken. Most of the exceptions fall into the following categories: • On-site meals provided to employees • Meal or entertainment treated as compensation to the recipient • Traditional recreational, social, or similar activities for employees • Goods, services, or facilities made available by the taxpayer to the general public • Reimbursed expenses related to a move • Business meetings of employees, stockholders, or directors • De minimis food and beverages • Entertainment costs for charitable purposes These exceptions allow for a full tax deduction, rather than being limited to 50 percent.
Being able to identify each of these exceptions on the front end could be of significant benefit. On-Site Meals Provided to Employees An employer that provides on-site meals for their own convenience can deduct those costs in full. These meals are considered to be for the “employer’s convenience” if they are provided for a substantial © Wipfli LLP non-compensatory business reason; for example, if the employee needs to be available for emergencies during his or her lunch break or if the time allowed for a meal is not long enough for the employee to get a meal elsewhere. Meal or Entertainment Treated as Compensation If an employer provides meals or entertainment to employees and treats the expense as compensation to those employees on their tax returns and as wages for income tax withholding purposes, the amount is not subject to the 50 percent limitation. Similarly, with an independent contractor, these expenses would be deductible in full if they are reported on Form 1099 and includible in the contractor’s gross income as compensation. Recreational, Social, or Similar Activities for Employees Expenses for traditional recreational, social, or similar activities for employees are not subject to the 50 percent limit provided they are primarily for the benefit of employees (other than highly compensated employees).
For example, if the bank has a holiday party or summer outing for their employees, this expense would be fully deductible for tax purposes. Goods, Services, or Facilities Made Available to the General Public Expenses for goods, services, or facilities that are made available by the taxpayer to the general public are exempt from the 50 percent limitation. For example, if you provide coffee or soft drinks to customers that come into the bank, these M&E expenses can be deducted in full. Reimbursed Expenses Related to a Move Reimbursed meals incurred during a move are not subject to the 50 percent limitation. If a bank reimburses an employee for moving expenses, keep in mind that these expenses must be included in the employee’s income, unless they meet the requirements of a “qualified moving expense reimbursement.” Business Meetings of Employees, Stockholders, or Directors Expenses directly related to the business meetings of employees, stockholders, or directors are deductible in full.
For example, if you bring in lunch for a staff business meeting, those expenses would not be subject to the 50 percent limitation. De Minimis Food and Beverages De minimis food and beverages are not subject to the 50 percent limitation. To qualify as such, M&E expenses must meet three criteria: • Not practical to account for administratively. • Infrequently provided. • Of little value. 1 . Insight Article For example, if a bank occasionally provides coffee or doughnuts to its employees, the cost of doing so is classified as de minimis benefits and would not be subject to the 50 percent limit. Occasional group meals or cocktail parties would also fall under this exception. Another example of a de minimis M&E expense is providing a meal or money to an employee in order to extend the employee’s normal work schedule due to overtime requirements. The meal offered during overtime qualifies as a de minimis benefit. general ledger accounts (one for 50 percent M&E deductions and one for fully deductible M&E expenses) will help to avoid this distinction being missed when the tax returns are prepared. Once identified, any expenses that are exceptions to the 50 percent limit can be booked to the appropriate general ledger account.
Doing so will allow you to get the maximum benefit for your M&E deductions going forward. Entertainment Costs for Charitable Purposes About the Author Ticket costs to sporting events that are arranged primarily for charitable purposes are exempt from the 50 percent limit. In order for these expenses to be fully deductible, the event must be organized with the main intent being to benefit a §501(c)(3) taxexempt organization, all of the net proceeds must benefit the charity, and volunteers must perform substantially all the work in carrying out the event. Kim Massopust is a tax manager who focuses most of her time within Wipfli LLP’s financial institution practice. Since joining the firm, Kim has used her experience and attention to detail to assist clients with their various tax needs.
In addition to serving financial institutions, she also enjoys working with many corporate and high-net-worth individual clients. Kim can be reached at kmassopust@wipfli.com. For example, if you purchase tickets to a golf tournament where the above criteria are met, the deduction may qualify as a fully deductible charitable donation (subject to charitable limits), rather than being subject to the 50 percent M&E limit. Tracking M&E Expenses Once you’ve identified M&E expenditures that fall into one of these exception categories, tracking them appropriately becomes equally important. Many banks record all of their M&E costs to one general ledger account.
When the federal tax return is prepared, this account is typically reduced by 50 percent for tax purposes. If there are items included in that account that fall into one of the exceptions discussed above, you may be missing out on significant deductions. It is essential to identify these excluded items on the front end and track the costs separately from your other M&E account. Having two © Wipfli LLP About Wipfli LLP The mission of Wipfli’s Financial Institutions Practice is to educate, advise, and assist financial institutions in successfully navigating the complex environment they face.
Our clients range from small community financial institutions to multi-billion dollar organizations. The practice consists of certified internal auditors, certified compliance specialists, former financial institution personnel, former regulators, and licensed certified public accountants regionally recognized for their knowledge and expertise. Whether your needs include regulatory compliance, profit improvement, risk management, strategic planning/board development, information technology, audit, or tax, let our experts assist you. For more information, visit www.wipfli.com. 2 .
Directly related to the active conduct of a trade or business. 2. Ordinary and necessary (not lavish or extravagant). 3. Properly substantiated. Once the above criteria are met, the expense is then generally subject to the 50 percent limitation referenced above.
While that is the general rule, this article will focus on the opportunity involved with expenses that can be deducted in full. Exceptions to the 50 Percent Limit There are a number of exceptions to the rules laid out by Section 274(n). It is important for banks to note not only that these exceptions exist, but also how to track these expenses separately so that full advantage can be taken. Most of the exceptions fall into the following categories: • On-site meals provided to employees • Meal or entertainment treated as compensation to the recipient • Traditional recreational, social, or similar activities for employees • Goods, services, or facilities made available by the taxpayer to the general public • Reimbursed expenses related to a move • Business meetings of employees, stockholders, or directors • De minimis food and beverages • Entertainment costs for charitable purposes These exceptions allow for a full tax deduction, rather than being limited to 50 percent.
Being able to identify each of these exceptions on the front end could be of significant benefit. On-Site Meals Provided to Employees An employer that provides on-site meals for their own convenience can deduct those costs in full. These meals are considered to be for the “employer’s convenience” if they are provided for a substantial © Wipfli LLP non-compensatory business reason; for example, if the employee needs to be available for emergencies during his or her lunch break or if the time allowed for a meal is not long enough for the employee to get a meal elsewhere. Meal or Entertainment Treated as Compensation If an employer provides meals or entertainment to employees and treats the expense as compensation to those employees on their tax returns and as wages for income tax withholding purposes, the amount is not subject to the 50 percent limitation. Similarly, with an independent contractor, these expenses would be deductible in full if they are reported on Form 1099 and includible in the contractor’s gross income as compensation. Recreational, Social, or Similar Activities for Employees Expenses for traditional recreational, social, or similar activities for employees are not subject to the 50 percent limit provided they are primarily for the benefit of employees (other than highly compensated employees).
For example, if the bank has a holiday party or summer outing for their employees, this expense would be fully deductible for tax purposes. Goods, Services, or Facilities Made Available to the General Public Expenses for goods, services, or facilities that are made available by the taxpayer to the general public are exempt from the 50 percent limitation. For example, if you provide coffee or soft drinks to customers that come into the bank, these M&E expenses can be deducted in full. Reimbursed Expenses Related to a Move Reimbursed meals incurred during a move are not subject to the 50 percent limitation. If a bank reimburses an employee for moving expenses, keep in mind that these expenses must be included in the employee’s income, unless they meet the requirements of a “qualified moving expense reimbursement.” Business Meetings of Employees, Stockholders, or Directors Expenses directly related to the business meetings of employees, stockholders, or directors are deductible in full.
For example, if you bring in lunch for a staff business meeting, those expenses would not be subject to the 50 percent limitation. De Minimis Food and Beverages De minimis food and beverages are not subject to the 50 percent limitation. To qualify as such, M&E expenses must meet three criteria: • Not practical to account for administratively. • Infrequently provided. • Of little value. 1 . Insight Article For example, if a bank occasionally provides coffee or doughnuts to its employees, the cost of doing so is classified as de minimis benefits and would not be subject to the 50 percent limit. Occasional group meals or cocktail parties would also fall under this exception. Another example of a de minimis M&E expense is providing a meal or money to an employee in order to extend the employee’s normal work schedule due to overtime requirements. The meal offered during overtime qualifies as a de minimis benefit. general ledger accounts (one for 50 percent M&E deductions and one for fully deductible M&E expenses) will help to avoid this distinction being missed when the tax returns are prepared. Once identified, any expenses that are exceptions to the 50 percent limit can be booked to the appropriate general ledger account.
Doing so will allow you to get the maximum benefit for your M&E deductions going forward. Entertainment Costs for Charitable Purposes About the Author Ticket costs to sporting events that are arranged primarily for charitable purposes are exempt from the 50 percent limit. In order for these expenses to be fully deductible, the event must be organized with the main intent being to benefit a §501(c)(3) taxexempt organization, all of the net proceeds must benefit the charity, and volunteers must perform substantially all the work in carrying out the event. Kim Massopust is a tax manager who focuses most of her time within Wipfli LLP’s financial institution practice. Since joining the firm, Kim has used her experience and attention to detail to assist clients with their various tax needs.
In addition to serving financial institutions, she also enjoys working with many corporate and high-net-worth individual clients. Kim can be reached at kmassopust@wipfli.com. For example, if you purchase tickets to a golf tournament where the above criteria are met, the deduction may qualify as a fully deductible charitable donation (subject to charitable limits), rather than being subject to the 50 percent M&E limit. Tracking M&E Expenses Once you’ve identified M&E expenditures that fall into one of these exception categories, tracking them appropriately becomes equally important. Many banks record all of their M&E costs to one general ledger account.
When the federal tax return is prepared, this account is typically reduced by 50 percent for tax purposes. If there are items included in that account that fall into one of the exceptions discussed above, you may be missing out on significant deductions. It is essential to identify these excluded items on the front end and track the costs separately from your other M&E account. Having two © Wipfli LLP About Wipfli LLP The mission of Wipfli’s Financial Institutions Practice is to educate, advise, and assist financial institutions in successfully navigating the complex environment they face.
Our clients range from small community financial institutions to multi-billion dollar organizations. The practice consists of certified internal auditors, certified compliance specialists, former financial institution personnel, former regulators, and licensed certified public accountants regionally recognized for their knowledge and expertise. Whether your needs include regulatory compliance, profit improvement, risk management, strategic planning/board development, information technology, audit, or tax, let our experts assist you. For more information, visit www.wipfli.com. 2 .
