Meals for the convenience of the employer
IRS Code §119 allows for 100% deductible meals when they are for the convenience of the employer and they are furnished on the business premises of the employer. The business premises must pass one of two tests: a “spatial” definition, which focuses on the physical extent of the employer’s property or a “functional” definition, which focuses on the performance of services by the employee.
The meals should not be given as a form of extra compensation or as perquisites (perks). Examples of why meals would be 100% deductible and also fully excludable from the employee’s income:
- Very short meal period allowed
- No available eating facilities outside the business premises
- Employee must remain on site for business reasons (to meet customers or to trade securities, for example)
- To attend mandatory business meetings
The meals must be just that: meals. Cash allowances or reimbursements for meals (and lodging for that matter) must be included in gross income by the employee.
The family may join the employee for the meals. §119(a) specifically states that your spouse and other dependents may partake in the free meals.
If a professional firm bills actual meal expenses separately when invoicing the client and is reimbursed by the client, the actual meal expenses for that engagement are fully deductible by the professional services firm. Likewise, the total invoice when collected is included in income when using the cash basis of accounting. The firm that reimburses that professional services firm is limited to a 50% deduction for the reimbursed portion related to meals. However, if the meals expense is included in the invoice but is not separately stated at actual cost, then those meal expenses are only 50% deductible. – The Tax Almanac
Specific Exceptions Allowing Full Deductibility
IRC Section 274(e) and (n) provide a number of situations where the 50 percent tax deduction scale-back will not be required. Following are the major exceptions that will allow the taxpayer to claim the full deduction:
- De Minimis Fringe Benefit Amounts — meals, entertainment and other employer-provided benefits that are relatively minor and difficult to track. Examples would include free soft drinks, snacks, etc. provided to office employees, as well as certain corporate picnics and similar events. Note that more elaborate events where the cost per person is relatively high (e.g. a higher-end holiday party) may not fall within the de minimis exception.
- Charitable-Sponsored Sporting Events — tickets or packages involving sporting events where the proceeds are payable to a registered charity, and the event is staffed primarily by volunteers.
- Employee Compensation Amounts — to the extent the employer reports the meal or entertainment expenditure as W-2 income to employees other than “insiders,” the amount will be deemed fully deductible. For example, a team-building fishing lodge trip reportable to the participating employees will generally be fully deductible. Obviously not a popular option for the employee, but can often be very tax effective.
- Reimbursed Expenses — to the extent a corporation incurs such expenses on behalf of a client/customer and there is an adequate accounting of such expenditures, such expenses will generally be fully deductible.
- Meetings of Business Leagues, etc. — costs associated with various IRC 501 organizations.
- Items Available to the Public or Sold to Customers — trade show costs, receptions, etc. open to the general public, or seminars/conferences/entertainment/ etc. open to the general public or for which customers/clients pay for attendance.
- Meals Provided to Certain Employees Working at Remote Locations — including, oil platforms, vessels and certain long-haul truckers.
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