Are you subject to the 50% limit on meal and entertainment deductions?

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mealsandentertainmentexpensesIn general, when meal and entertainment expenses are incurred in the context of an employer-employee or customer–independent contractor relationship, one party will be subject to a 50% limitation on the deduction. But which party? Last year, the IRS finalized regulations that address this question.

 

In the employer-employee setting:

  • If the employer reimburses the employee for meal or entertainment expenses and treats the reimbursement as compensation, the employee reports the entire amount as taxable income. The employer deducts the payment as compensation, and the employee may be able to claim a business expense deduction, subject to the 50% limit.
  • If the employer does not treat the reimbursement as compensation, the employee excludes the entire amount from taxable income and the employer deducts the expense, subject to the 50% limit.

In a customer–independent contractor setting, the final regulations allow the parties to agree as to who will be subject to the 50% limit. If there is not an agreement, then:

  • If the contractor accounts to the customer for meal and entertainment expenses reimbursed by the customer (i.e., properly substantiates the expenses), the 50% limit applies to the customer.
  • If the contractor does not, the limit applies to the contractor.

The rules surrounding meal and entertainment expense deductions are complex. Please contact us to ensure you are making the most of the deductions available to you but not putting yourself at risk for back taxes, interest and penalties.

 

Source: PDI Global; Image: bookkeeping-essentials


About the Author

Keiter CPAs is a certified public accounting firm serving the audittax, accounting and consulting needs of businesses and their owners located in Richmond and across Virginia. We focus on serving emerging growth businesses and companies in the financial servicesconstructionreal estatemanufacturingretail & distribution industries and nonprofits. We also provide business valuations and forensic accounting servicesfamily office services, and inbound international services.

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