The Impact of Meal and Entertainment Expenses on Your Corporate Tax Return
Does the thought ever cross your mind when you’re taking that client, or that key employee, out to lunch, “I wonder how I should report this on the tax return?” Probably and hopefully not … as those types of thoughts should not be foremost in mind when you’re developing and growing your business.
However, how that expense is coded in your books and records will eventually affect your bottom line.
In general, the amount allowed as a deduction on your Federal income tax return for “meal and entertainment expenses” are limited to 50% of those expenses. This is generally referred to as a ‘limitation’ on the deductibility of this type of expense. However, no rule would be complete without exceptions, and this rule has many. To list all would take several pages, the four most pertinent ones, whereby expenses for meals and entertainment are entitled to a 100% deduction are:
- Meals provided for the convenience of the Employer
- Expenses treated as compensation
- Recreational expenses for employees (e.g. golf fees at company party)
- De minimis amounts of food or beverage
There are many others, some very targeted to industry groups like OTR drivers subject to DOT regulations! The take away though is you may not have to accept that 50% limitation.
Finding these exceptions to the general rule in accounts that may have thousands of entries is time consuming and resource draining. The IRS has allowed statistical analysis to help in these efforts though. If a taxpayer conducts a statistical sample within perimeters determined by the IRS, the Service will allow the extrapolation of that sample to the entire population. In other words, a taxpayer may only have to look at a hundred or so actual entries and use those results to extrapolate to the entire account with thousands of entries.
Here at Lurie LLP we have developed a process to streamline the Statistical Study, analysis of the sample and deliver a report that supports the extrapolation. Often taxpayers find that, on an entire account basis, instead of a 50% deduction being available for a deduction that percentage is closer 65 – 70%! Please call our Specialty Tax Services practice to see if this approach could help reduce your tax liability, make efficient use of your internal finance and tax resources and continue to free you to think about growing your business while at lunch, and not think about tax ramifications of that sandwich.
Director, Specialty Tax Services