Running a business? Then, you know that money you spend for meals – or entertainment- that are business related are not fully deductible. Oh, sure, if you spend $ 100 wining and dining a client, your profits have been reduced by $ 100. Except that’s not how it appears on your Schedule C or Form 1120 or Form 1065. Because only 1/2 of that expense is deductible.

And, if you don’t document who you took where- or why you were away on business, than you get to deduct NOTHING.

The Internal Revenue Code (IRC) Section 119(a) stipulates that providing a meal for an employee does not count as taxable compensation if that meal is provided while at the employer’s business premise and/or for the convenience of the employer.

Furthermore, IRC Section 247(n)(1) is where we see the 50% deductibility to a business that covers meals for executives  and other employees traveling on business.  It also exempts 100% of the meals paid at employer-operated eating facilities if…

• the facility is located on or near the business premises of the employer;
• the revenue derived from the facility normally equals or exceeds the direct operating costs of the facility; &
• the facility does not discriminate in favor of highly compensated employees, in other words, everyone is fed and treated in similar fashion.

That’s where the exception, the 100% deduction (matching your actual costs) is derived.  This proviso applies when your staff stays on site, so they work overtime or similar reasons. (We generally include a special account [in our clients’ chart of accounts] for those expenses, so we don’t miss the fully deductible item.)

But, a new wrinkle may have just opened up. The US Tax Court (148 TC No. 24, Docket 19009-15) just provided that hole in Jacobs v. Commissioner.

 

The Jacobs in this lawsuit are Jeremy and Margaret Jacobs. And, who are they? Via a slew of entities, they own the Boston Bruins, the Boston-based hockey team.

What did they do? They deducted 100% of the meals they provided their team and staff members when the team are on the road. (Remember, only 100% of meals provided to employees while AT the corporate offices are deductible.)

And, the Judge, Robert P. Ruwe, after hearing the evidence, told the IRS they were wrong.  The judge was siding with the Jacobs. But, before you feel you can do this to, consider the five factors Ruwe included to derive his decision.

• The first one- and the big one- the Bruins served the meals to the folks in a separate space. (The judge considered this space rented by the Bruins, since it was provided free, as an add-on to their already large bills for lodging and food.)
• Moreover (this is a separate reason), the meal room was near the business premise of the Bruins. Because the Courts have already held that hotel rentals are considered business premises for companies that engage (rent) the rooms and facilities.
• The Bruins also chose the menu- not the team or staff members- and paid for the food in full.
• And, those meals were provided during the workday- or just before the workday or just after it.
• Which meant that the meals were provided for the convenience of the Bruins management- and were, therefore, not taxable to the players or staff.

So, given these factors, when we decide to effect training or morale building, we need to follow these rules. Notice that it may not work at stand-alone restaurants. Unless the IRS changes their regulations to allow it. For right now, the deduction will require the food be served in the hotels or venues we rent for those meetings.

Or, you can just deduct 50% of the costa.