Page 46

Related expenses. Taxes and tips relating to a meal or entertainment activity you reim- burse to your employee under an accountable plan are included in the amount subject to the 50% limit. Reimbursements you make for ex- penses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity isn’t subject to the 50% limit. Amount subject to 50% limit. If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. • The per diem allowance. • The federal rate for M&IE. If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. Meal expenses when subject to “hours of service” limits. You can deduct 80% of the cost of reimbursed meals your employees con- sume while away from their tax home on busi- ness during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. See Pub. 463 for a detailed discussion of in- dividuals subject to the Department of Trans- portation's “hours of service” limits. De minimis (minimal) fringe benefit. The 50% limit doesn’t apply to an expense for food or beverage that is excluded from the gross in- come of an employee because it is a de minimis fringe benefit. See Pub.15-B for additional infor- mation on de minimis fringe benefits. Company cafeteria or executive dining room. The cost of food and beverages you provide primarily to your employees on your business premises is deductible. This includes the cost of maintaining the facilities for provid- ing the food and beverages. These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just dis- cussed, or unless they are compensation to your employees (explained later). Employee activities. The expense of provid- ing recreational, social, or similar activities (in- cluding the use of a facility) for your employees is deductible and isn’t subject to the 50% limit. The benefit must be primarily for your employ- ees who aren’t highly compensated. For this purpose, a highly compensated em- ployee is an employee who meets either of the following requirements. 1. Owned a 5% or more interest in the busi- ness during the year or the preceding year. An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal de- scendants. 2. Received more than $80,000 in pay for the preceding year. You can choose to in- clude only employees who were also in the top 20% of employees when ranked by pay for the preceding year. For example, the expenses for food, bever- ages, and entertainment for a company-wide picnic aren’t subject to the 50% limit. Meals or entertainment treated as compen- sation. The 50% limit doesn’t apply to either of the following. 1. Expenses for meals or entertainment that you treat as: a. Compensation to an employee who was the recipient of the meals or en- tertainment, and b. Wages subject to withholding of fed- eral income tax. 2. Expenses for meals or entertainment if: a. A recipient of the meals or entertain- ment who isn’t your employee has to include the expenses in gross income as compensation for services or as a prize or award; and b. You include that amount on a Form 1099-MISC issued to the recipient, if a Form 1099-MISC is required. Sales of meals or entertainment. You can deduct the cost of meals or entertainment (in- cluding the use of facilities) you sell to the pub- lic. For example, if you run a nightclub, your ex- pense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. The 50% limit doesn’t apply to this expense. Providing meals or entertainment to gen- eral public to promote goodwill. You can deduct the cost of providing meals, entertain- ment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. The 50% limit doesn’t apply to this expense. Director, stockholder, or employee meet- ings. You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. You can provide some minor social activities, but the main purpose of the meeting must be your company's business. These ex- penses are subject to the 50% limit. Trade association meetings. You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. These organi- zations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. Nonaccountable Plans A nonaccountable plan is an arrangement that doesn’t meet the requirements for an accounta- ble plan. All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. The payments are subject to income tax withholding, social security, Medi- care, and federal unemployment taxes. You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibil- ity tests for employees' pay in chapter 2. Deduct the allowable amount as compensation or wa- ges on the appropriate line of your income tax return, as provided in its instructions. Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. Advertising expenses. You generally can de- duct reasonable advertising expenses that are directly related to your business activities. Gen- erally, you can’t deduct amounts paid to influ- ence legislation (for example, lobbying). For more information, see Lobbying expenses, later. You can usually deduct as a business ex- pense the cost of institutional or goodwill adver- tising to keep your name before the public if it relates to business you reasonably expect to gain in the future. For example, the cost of ad- vertising that encourages people to contribute to the Red Cross, to buy U.S. Savings Bonds, or to participate in similar causes is usually de- ductible. Anticipated liabilities. Anticipated liabilities or reserves for anticipated liabilities aren’t deducti- ble. For example, assume you sold 1-year TV service contracts this year totaling $50,000. From experience, you know you will have ex- penses of about $15,000 in the coming year for these contracts. You can’t deduct any of the $15,000 this year by charging expenses to a re- serve or liability account. You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. Bribes and kickbacks. Engaging in the pay- ment of bribes or kickbacks is a serious criminal matter. Such activity could result in criminal prosecution. Any payments that appear to have been made, either directly or indirectly, to an of- ficial or employee of any government or an agency or instrumentality of any government aren’t deductible for tax purposes and are in vi- olation of the law. Payments paid directly or indirectly to a per- son in violation of any federal or state law (but only if that state law is generally enforced, de- fined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business aren’t allowed as a de- duction for tax purposes. Meaning of “generally enforced.” A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extra- ordinarily flagrant. For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. Chapter 11 Other Expenses Page 45