Meals and Entertainment Deduction: Don’t Leave Money on the Table
September 27, 2017
When it comes to the meals and entertainment deduction, many people leave money on the table, unaware of certain valuable exceptions.
It’s true that the M&E deduction is generally limited to 50 percent of the cost incurred. But many qualifying expenses allow for a full 100 percent deduction.
Don’t miss out on the extra savings.
Seize the Opportunity
To take full advantage of the meals and entertainment deduction, look closely at your current job-related expenses. Business leaders who fail to do so are bound to pass over at least one of the below categories.
Do yourself and your business a favor, and review the following segments in which taxpayers most frequently miss opportunities to claim a 100 percent deduction of the cost incurred:
Ordinary and Necessary M&E Charges
The IRS allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Under this guidance, “ordinary and necessary expenses” can include:
- Office supplies;
- Lodging and transportation travel expenses; and
- A work uniform or any other non-M&E related expenses that sometimes get categorized to the M&E account.
Expenses for Recreational or Social Activities
Here, “recreational activities” that are offered for the primary benefit of the employee encompass goods and services provided at company-sponsored events.
For example, if you sponsor a company picnic for all staff levels of employees, the full amount spent on food and beverages might be deductible.
De Minimis Fringe Benefits
The IRS defines de minimis fringe benefits as “any property or service, provided by an employer for an employee, the value of which is so small in relation to the frequency with which it is provided, that accounting for it is unreasonable or administratively impracticable.”
In the realm of M&E deductions, de minimis fringe benefits apply to food and beverages, such as coffee or donuts your company provides to your team on an occasional, non-recurring basis.
If you have any client contracts that call for M&E expenses to be reimbursed, you should note that these expenses will generally be deducted in full by the taxpayer being reimbursed.
In this scenario, the party that reimburses is responsible for filing the M&E expenses incurred at the reduced, 50 percent rate, unless an agreement is in place that states otherwise.
Develop a Plan of Action
To identify the categories in which you may be overpaying, you must take a closer look at your current M&E expenses. Once you review your documentation, work with your CPA to address any issues or to fine-tune your time and expense system to better allocate meal and entertainment expenses to the appropriate categories (50 percent vs. 100 percent).
Together, you can develop a plan to reduce your annual M&E disallowance and maximize your recurring tax benefits. Doing so will put you in a better position to lower your existing tax rate and improve your cash flow.
The IRS continues to clarify the meals and entertainment deduction allowed. As you begin to review your tax documentation, make sure to review the most up-to-date guidelines to get the most out of the latest exceptions.
The important thing is to make sure you’re not missing out on this often-overlooked deduction opportunity — so that you’re not leaving money on the table.