Meals and Entertainment Expenses Can Be 100% Deductible
In general, a taxpayer may deduct only 50% of its business-related meals and entertainment expenses. This is commonly known as the 50% limit on meals and entertainment expenses.
The 50% limit typically applies to the following business meals and entertainment expenses:
- Meals incurred while traveling away from home on business matters;
- Expenses incurred while entertaining clients or customers at taxpayer’s place of business, a restaurant or other locations; or
- Expenses incurred while attending conferences or seminars, or other business meetings.
However, not all meals and entertainment expenses are subject to the 50% limit. The Internal Revenue Code lists several exceptions. One particular exception is the “de minimis fringe” exception. The Tax Court in Jacobs v. Commissioner, 148 T.C. No. 24 (2017) decided that the owner of the professional hockey team Boston Bruins could deduct 100% of the expenses incurred on meals for the hockey players and personnel at the away city hotels. In Jacobs, the Internal Revenue Service had disallowed 50% of the meals and entertainment expenses incurred at away city hotels. The Tax Court ruled in favor of the taxpayer and concluded that the full amount spent on meals and entertainment at away city hotels was deductible. In reaching this conclusion, the Tax Court reasoned that the expenses met the “de minimis fringe” exception requirements and were not subject to the 50% deduction limit.
To qualify as a de minimis fringe, the expenses must meet all of the following conditions:
- Provision of the meals and entertainment satisfies the nondiscriminatory requirements and does not favor highly compensated employees;
- The facility is owned or leased by the employer;
- The facility is operated by the employer;
- The facility is on or near the employer’s business premises;
- The revenue derived from the facility equals or exceeds the direct operating costs of the facility; and
- Meals were furnished during or immediately before or after an employee’s workday.
The Tax Court found that all of the de minimis fringe exception requirements were satisfied in Jacobs, and concluded that the expenses incurred for the provision of pregame meals and snacks to the traveling hockey employees at away city hotels were 100% deductible.
What is interesting about Jacobs is that, as an alternative, the taxpayer argued that another 50% limit exception might apply. Section 274(e)(8) of the Internal Revenue Code exempts from the 50% limit “[e]xpenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money’s worth.” Under Treas. Reg. Sec. 1.274-2(f)(2)(ix), this exception applies to “[a]ny expenditure by a taxpayer for entertainment … to the extent the entertainment is sold to customers in a bona fide transaction for an adequate and full consideration in money.” The taxpayer argued that expenses incurred at the away city hotels were part of the expenses incurred by the hockey team to provide entertainment to its fans. Since the Court had already reached its conclusion under the de minimis exception, the Court did not analyze this argument.
In sum, if a taxpayer incurs meals and entertainment expenses while traveling away from home, Jacobs provided a good road map as to how to qualify these expenses under the de minimis fringe exception. In that regard, the Jacobs case might have a broader application in entertainment industries outside of professional sports, such as actors, singers, dancers, and recreational show performers. Commentators have analyzed how the Jacobs opinion might be available to other industries other than sports teams, including a recent example here. In addition, if the expenses relate to entertainment, then the alternative argument that was not addressed in Jacobs might be a viable option to avoid the 50% limit on meals and entertainment expenses.