BGBC Partners, LLP Tax Update: Fully Deductible Meals and Entertainment Expenses
Summer is here, and that means it is time to get outside and enjoy the sunshine! If your business hosts summer employee outings then the business is eligible to write-off 100% of the expenses for tax purposes. So what are the rules for deducting meals and entertainment expenses? That is what we will explain in this segment of our Tax Update.
Many business owners assume that all meals and entertainment expenses are automatically subject to a 50% limitation. This is not necessarily so. There are many meal and entertainment expenses which are 100% deductible.
A summer office outing is a great example of a meals and entertainment expense that would be fully deductible if it met all the following criteria- The expenses are related to recreational, social, or similar activities;
- The expenses are incurred primarily for the benefit of employees, other than highly compensated employees, such as food and beverages at a company picnic provided by the employer. A highly-compensated employee would be someone who is more than a five percent owner or an individual with compensation in excess of $120,000 (this is the amount for 2016 and it may change since it is subject to indexing).
If your business would like to take employees on a summer outing, that also might be deductible. Outings include tickets to a fund-raising charitable sporting event, such as a golf outing or baseball tournament, if it was organized to benefit a Section 501(c) (3) organization, and all proceeds are contributed to the organization.
Another example is a company sponsored holiday party. Holiday parties are 100% deductible and follow the same rules as the summer outings discussed above.
Food items made available to the public as samples or promotional materials are also not subject to the 50% limitations. Meals served to customers such as a deli in a grocery store are not limited. An exemption is also allowed for de minimis benefits such as coffee provided by the employer at the office.
Another category of fully-deductible meals and entertainment expenses are those which are treated by an employer as compensation and reported on the employee’s Form W-2.
Finally, if you have an employee whose business entertainment expenses are fully substantiated and reimbursed under an accountable plan (i.e., in general, they are required to keep receipts and are paid only up to the amount of those receipts), your business can generally deduct 100% of these expenses. However, the employee may be on the hook for the 50% limitation rule.
As you can see, meals and entertainment expenses can be more involved than at first glance. Enjoy some fun in the sun this summer, but make sure to consult a trusted C.P.A. to help keep the expenses out of the hands of a pesky IRS auditor.
