Meals and Entertainment Expenses Not Subject to 50% Limitation

Usually, meals and entertainment expenses are subject to a 50% limitation. Only 50% of these expenses are authorized as a deduction on your tax return. However, some meals and entertainment expenses are 100% deductible.

What Types of Meals and Entertainment Expenses Are 100% Deductible?

The following types of expenses are 100% deductible:

• Costs for services, goods, and facilities that are treated as wages to the recipient;
• Reimbursed costs when the services for which reimbursement is made are performed for the employer and are not treated as wages to the recipient;
• Recreational costs primarily for workers who are not highly compensated (e.g., company picnic);
• Cost of goods, services, and facilities made available to the public;
• Entertainment sold to consumers in a bona fide transaction for adequate consideration (i.e., sold for cash)
• Goods, services, and facilities that are given to nonemployees as entertainment, amusement, or recreation expenses and that are includible in the recipient’s income;
• Food and beverage costs that are excludable from the recipient’s income as de minimis fringe benefits;
• The price of a ticket package to a sporting event and related costs if the event is organized to benefit a tax-exempt organization, all net proceeds of the event are contributed to such organization, and volunteers perform all of the work substantially in carrying out the event; and
• Employee’s meal expenses incurred while moving are reimbursed by the employer and included in the employee’s gross income.

Do These Expenses Need to Be Substantiated?

Yes. Although these expenses are 100% deductible, supporting evidence must be available to demonstrate that these expenses were incurred to be deducted from the taxpayer’s tax return.

Substantiation Requirement for Certain Business Expenses

Tax law mandates that taxpayers be able to supply adequate records or sufficient proof to establish certain business expenses; otherwise, they cannot be taken as deductions.

What Are the Types of Business Expenses Covered Under This Substantiation Rule?

The types of expenses that are covered under the substantiation rule include:

• Traveling and lodging costs;
• Entertainment costs;
• Business gifts; and
• Costs related to the use of cars, computers, and cellular phones.

Substantiation is needed for these costs because they are often the more standard expenses susceptible to abuse.

What Do I Need to Substantiate?

There are four things that the taxpayer needs to substantiate:

• The amount of the expense;
• The time and place of the cost;
• The business purpose of the cost; and
• The business relationship between you and the individual who entertained/received your gift.

What Types of Records or Evidence Do I Need?

Typically, expense diaries and account books would be the proper types of records. Receipts and paid bills are usually required as supporting evidence for expenses over $75. Written documentation is preferred over oral confirmations, and more contemporary records are better than records not prepared at or near the time of expenditure.

Are There Any Exceptions to This Substantiation Rule?

Suppose the taxpayer can show that they lost their records due to circumstances beyond their control (e.g., a fire, earthquake, or flood). In that case, the taxpayer may use other reasonable means to substantiate the costs. Otherwise, this substantiation rule is generally rigidly applied.

What Happens When Not All of My Expenses Are Business Expenses?

When costs (e.g., entertainment expenses) are incurred for both business partners and personal friends simultaneously, the taxpayer must make a reasonable allocation only to deduct the amount associated with business and not with personal purposes.

What Are Employee Fringe Benefits?

Employee fringe benefits are those benefits that an employee accepts due to their employment. It may also include benefits provided through an entity other than the person’s employer.

It is essential to note that the term employee includes employees who are retired or disabled. The worker’s spouse and dependent kids may also claim the employee fringe benefits.

Are Employee Fringe Benefits Taxable as Gross Income?

The United States federal tax code defines gross income as “any instance of undeniable accession to wealth from whatever source derived.” According to this definition, employee fringe benefits are taxable gross income for all taxpayers.

Does the IRS Exclude Some Benefits not Taxable as Gross Income?

The Internal Revenue Service (IRS) has designated several fringe benefits that are not taxable as gross income. It is essential to mention that the IRS has said that benefits that are excluded from their general rule, which provides that benefits are gross income, are only excluded if the benefit is available to all company employees.

In other words, if all company employees do not have access to a certain benefit, then that benefit cannot be excluded from an individual taxpayer’s gross income no matter what. This practice is known as the non-discrimination rule.

For instance, if an airline company allows its executive employees to fly without cost but does not permit airline attendants to fly for free, the airline cannot claim that as an exclusion. This rule aims to encourage companies to give all of their employees access to the same benefits, regardless of where the employee is in the company’s hierarchy.

What Are the Exact Fringe Benefits Excluded from Being Taxed as Gross Income?

Some fringe benefits are excluded from being taxed as gross income. These include:

• No additional cost to employer services;
• Qualified employee discounts;
• Working condition fringes;
• De minimis fringe;
• Qualified transportation fringe;
• Qualified moving expense reimbursement;
• Qualified lodging exclusion; and
• Reciprocal agreement.

A no additional cost to employer services benefit is a benefit that an employer offers to an employee that does not cause the employer to incur significant expenses. This includes foregone revenue.

The service, nevertheless, must be in the same line of work that the worker performs. For instance, an airline attendant who flies for free may exclude the benefit on their tax return so long as the airline attendant does not cause another patron to give up their seat. This exclusion is included in the non-discrimination rule.

Some employers permit qualified employee discounts. If this discount is provided on a service, companies are limited to providing a 20% discount. If the discount is on a good or something tangible, companies are generally limited to discounting the good to cost, or what they bought it for, or greater. This exclusion is included in the non-discrimination rule.

A working condition fringe benefit is a benefit that is furnished by an employee free of charge; had the person paid for it, they would have gotten a business deduction. This benefit usually covers the benefits required for workers to perform their duties.

The most common examples include employee training and the use of a company automobile. It is essential to mention that the taxpayer does not get to exclude and deduct this benefit but gets to forgo reporting it as a part of their gross income. This exclusion is included in the non-discrimination rule.

A de minimis fringe benefit is an individual’s benefit that their employer does not do an account for, such as coffee in the employee lounge or copy paper. It is essential to mention that the employer may still be able to take deductions for these things even though the taxpayer took them as exclusions from their income. This exclusion is not included in the non-discrimination rule.

Do I Need an Attorney to Help Me with My Tax Problems?

Tax laws are complicated and ever-changing. While different tax preparation programs are available to assist you in filing your returns, they cannot deliver the same level of service that an experienced and knowledgeable tax attorney can provide.

If you are unsure about the characterization of your expenses or you need someone to represent you before the IRS, a tax lawyer can help you.