Business meals, travel, and entertainment deductions

Business-Meal Loopholes

The Tax Reform Act of 1986 put tough limits on deductions for business meals and entertainment. Only 50% of these expenses is deductible. The limit applies to food, beverages, taxes, tips, tickets, cover charges, and whatever else you spend for business purposes on eating out and entertainment. All are just 50% deductible.

Even though the value of deducting an extra $1 of business-meal expenses was reduced because of the drop in tax rates, the incentive to get the biggest deduction legally possible still exists.

The Angles

Reimbursement angle. Employees are not subject to the 50% rule if their company reimburses them for business-meal and entertainment expenses. It’s the company that’s subject to the rule-the company must limit the amount of the deduction it claims on its tax return to 50% of the amount given to reimburse the employee. Bottom line: The tax law has no adverse effect on the expense account of an employee who is reimbursed in full for business-meal and entertainment costs. It may be more desirable to have your employer reimburse you than for you to receive an expense allowance and deduct meal and entertainment expenses on your own return, as they will be limited to 50%.

Lodging loophole. The 50% rule applies to business meals (including those you eat while traveling away from home on business) and to entertainment of travel expenses and, thus, are not subject to the rule. Question: What if your hotel rate is stated only on the European or American plan and includes either two or three meals a day? Is your hotel bill (including meals) fully deductible? The new law does not say. This may be a loophole.

Company-party loophole. The 50% rule does not apply to certain traditional employer-paid social or recreational activities that are primarily for the benefit of the employees. Holiday parties and annual summer outings will continue to be fully deductible.

Strategy: Include in your travel plans conventions that provide three meals a day and a speaker at each meal as part of the cost.

Source: Randy Bruce Blaustein, former IRS agent, now a partner of Blaustein, Greenberg & Co., 155 E. 31 St., New York 10016

How To Prove Business Purpose Of Spouse On Company Trip

It’s possible to deduct the cost of taking your spouse on a business trip. The key is to prove your spouse’s involvement in the business aspects of the trip.

Guidelines:

Explain your job responsibilities to your spouse.

Involve your spouse in interacting with people relevant to the trip and with other spouses who are present. They should discuss general aspects of the job being worked on. There’s no need for detailed descriptions of the business project

Make sure there are official functions, such as seminars, dinners, and parties, to which spouses are invited. (If you’re not self-employed, ask your employer to specify that it’s mandatory to take spouses to these events.)

Eat all your meals with business associates. Make sure that business is discussed at each of these meals and that your spouse participated in the discussions.

Document all of your spouse’s ideas on the business by having your spouse write memos to you containing these ideas.

If it’s the policy of the company not to pay for spouses on business trips but to require the spouse’s attendance, request a written memo from your employer stating this policy.

Source: New Tax Traps/ New Opportunities by Edward Mendlowitz, CPA, Boardroom Special Report, Springfield, NJ 07081.

Business-Gift Loophole

An advertising company employed an independent salesman. As favors to prospective customers, he gave out $40,000 worth of tickets to shows and sporting events. The company paid for the tickets and deducted their full cost. IRS position: The company’s expense deduction was subject to the limit of $25 per recipient under the tax law. Court’s decision: The ticket expenses were deductible by the company. The $25 business-gift limitation applied to the independent salesman, not to the company that employed him.

Source: World Wide Agency, Inc., TC Memo 1981-419

Expense Formula Fails

A company had many representatives traveling on the road. It reimbursed their travel costs for transportation, meals, and lodging on a cents-per-mile basis. IRS ruling: The number of miles and employee travels doesn’t give an adequate indication of the amount he/she spends on meals or lodging. Thus, the company’s reimbursement formula in not sufficient to make the reimbursements tax-free.

Source: IRS Letter Ruling 8634029.

Travel and Entertainment Rules

The Tax Reform Act of 1986, as amended, limits deductions for most meals and entertainment to 50% of cost. Moreover, the expenditures qualify as business meals or business entertainment only if business is actually being discussed. Business transportation (air fare, cabs, etc.) remains fully deductible, but travel to investment seminars or investment conventions is not.

Here’s a checklist showing the deductibility of some common travel and entertainment expenses:

Type of expense                                                                                             Deductible

Lunch with customer; business discussed before, during,

Or after the meal…………………………………………………………50%

Cab fare to restaurant…………………………………………………….100%

No business discussed……………………………………………………None

Air far to Chicago to call on customer……………………………….100%

Lodging in Chicago………………………………………………………100%

Meals in Chicago (alone)…………………………………………………50%

Meals with customer, no business discussed:

Your meal…………………………………………………………50%

Customer’s meal………………………………………………….None

Air fare to L.A. for doctor to attend medical convention…………….100%

Meals in L.A………………………………………………………………50%

Air fare to Houston for investment seminar…………………………..None

Lodging in Houston……………………………………………………….None

Tickets to ballgame for taxpayer and customer; business discussed….50%

Cab fare to game…………………………………………………………..100%

Food and drink at game……………………………………………………50%

Complimentary theater tickets for customer; taxpayer not present……None

Lunch at service organization as member……………………………..50%

Tickets to charity golf tournament run by volunteers…………………100%

Greens fees, carts, food and beverages consumed while

Hosting customers; business discussed……………………………………50%

Trooper Costs

Minnesota State Troopers were required to take their on-duty meals in public restaurants to maintain public visibility. When off duty, they were required to make sure their patrol cars were parked off the street. Steven Pillsbury and Karl Christey were troopers who claimed business deductions both for their meal costs and the cost of renting garage space for their vehicles. Court: The meals were properly deducted because they were clearly a required part of the job. The garage costs were not deductible because it was not necessary for the troopers to rent garage space in order to keep the cars off the street.

Source: Steven Pillsbury, D Minn., No. 3-85-1361

On-The-Job Meals

Robert Walsh worked in a grocery store and was required to be on the premises at all times during his shift, in order to meet emergencies. For meals, he bought food from the store, ate on the premises, and deducted the cost as a business expense. Tax Court: To get a deduction a worker must be required to buy meals that are provided by the employer. Walsh was not entitled to a deduction because he could have brought his lunch from home.

Source: Robert M. Walsh, TC Memo 1987-18