Travel & Entertainment Expenses
Are all business meals and entertainment costs subject to the 50-percent limitation?
June 23, 2011
The long-established requirement that expense is ordinary, necessary and reasonable governs the deduction of business meals and entertainment expenses. The need to distinguish the difference between business-related and personal meals and entertainment expenses has been a challenge in the courts. Over the years, Internal Revenue Code Section 274 has been modified several times to arrive at its current version, whereby 50 percent of the meals and entertainment expenses are disallowed as a deduction. The most recent change to this section (in 1993) also introduced the disallowance of membership dues in clubs organized for business, pleasure, recreation or other social purpose.
Fifty Percent Disallowance for Entertainment and Meal Costs
Section 274(n) requires that the amount of an otherwise allowable deduction for the cost of business entertainment and meals generally be reduced by 50 percent. Thus, only 50 percent of the cost of any item with respect to an activity generally considered to constitute entertainment, amusement or recreation and only 50 percent of the cost for food and beverage, may be deducted, subject to the various exceptions.
While the general rule requiring the 50-percent reduction in the otherwise deductible meal and entertainment expenses relates to “the amount allowable as a deduction under this chapter,” the 50-percent limitation apparently does not apply to all deductions for meals, because the reduction is limited to only meals consumed in connection with the taxpayer's trade or business or in connection with an income-producing activity. Therefore, meals consumed while traveling for medical purposes or while performing charitable services away from home should not be subject to the 50 percent limitation, because medical treatment or charitable contributions are not part of the taxpayer's trade or business. Accordingly, the costs of meals consumed in connection with either (provided that the meals are otherwise deductible as medical expenses or charitable contributions) are arguably fully deductible.
Exceptions to the Disallowance
Ostensibly, the rationale for cutting back the deductibility of meal and entertainment costs was to limit the tax subsidy of the personal consumption element that Congress considered to be intertwined with costs of this nature. Nevertheless, there are several exceptions to the general reduction rule. The presumption is that each exception involves insufficient personal benefit to justify the disallowance. Thus, meal and entertainment expenses that meet any one of the following criteria remain 100 percent deductible and exempt from the 50 percent disallowance that is otherwise mandated:
Meals to EmployeesProviding meals to employees can also be fully deductible in which the meals are excludable from an employee’s income under Section 119 and are also considered a de minimus fringe benefit under Section 132. If more than one-half 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. The employer can fully deduct the meals without the 50-percent disallowance and are excludable from the employee’s income.
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Mary F. Bernard, CPA, is director — income/franchise tax, at the Dallas, Texas-headquartered tax services firm of Ryan. Bernard formerly worked as principal, director of State & Local Tax Services, at Providence, RI-based Kahn, Litwin, Renza & Co., Ltd.