The IRS recently proposed regulations (REG-101812-07) addressing
deduction limitations under Sections 274(a) and (n) for
reimbursement or other expense-allowance arrangements for meals and
entertainment. In general, Section 274(a) does not allow a tax
deduction for entertainment expenses that are not related to
business, and Section 274(n) limits the tax deduction for meals to
50 percent of the expense. These proposed regulations provide
guidance on who is subject to these deduction limitations when
employees and independent contractors are reimbursed for meals and
entertainment expenses by an employer or other service recipient,
and for multiparty reimbursement arrangements.
The proposed regulations provide that only one party is subject
to the deduction limitations under Section 274. When an employee is
reimbursed for meals and entertainment expenses by the employer,
the employer is the party subject to the Section 274 deduction
limitations if the employer does not treat the reimbursement as
compensation to the employee. Conversely, if the employer does
treat the reimbursement as compensation to the employee, the
compensation expense is fully deductible by the employer, and the
employee is the party subject to the deduction limitations under
Section 274 (if the employee deducts the expenses as a business
expense on his or her return).
In addition to addressing employer-employee reimbursement, the
proposed regulations address the situation in which a service
recipient reimburses an independent contractor for meals and
entertainment expenses. In that case, the service recipient and the
independent contractor may express in writing who is subject to the
limitations. If they do not do so, the deduction limitations apply
to the service recipient if the independent contractor provides the
service recipient with substantiation of the expenses that meets
the requirements of Section 274(d). If the independent contractor
does not provide substantiation, the deduction limitations apply to
the independent contractor.
Section 274(d) requires substantiation of:
the amount of the expense;
the time and place of the travel, entertainment, amusement,
recreation or use of the facility or property;
the business purpose of the expense; and
the business relationship to the taxpayer of the people
entertained or using the facility or property.
The proposed regulations also address situations involving a
multiparty reimbursement arrangement. An example is an arrangement
in which (1) an employee pays or incurs an expense subject to a
Section 274 limitation, (2) the employee is reimbursed for that
expense by his or her employer and (3) the client of the employer
reimburses the employer. Only one party is subject to the deduction
limitation. Generally, the client is subject to the deduction
limitation as long as the agreement between the employer and client
provides for the reimbursement, and the employer provides the
client with substantiation of the expense. The client and employer
may agree in writing, however, that the employer will be the party
subject to the deduction limitation.
These regulations are proposed to apply to expenses paid or
incurred in the taxable year beginning on or after the regulations
become final, but taxpayers may rely on the regulations before they
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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