Deducting Meals and Entertainment
Are tickets to the Red Sox game deductible?
Deducting meals and entertainment (M&E) can be a little tricky. Say you bought some grandstand tickets to take your favorite customer to a Red Sox Game. While you were there you had a few beverages and snacks with the customer. You bring back the receipt and from there it becomes meals and entertainment expense in the trial balance. Then some time later it is time to gather information for the tax return. Are those tickets fully deductible? Are they subject to a limit? What about those sodas and hot dogs you had with the client? Does the Internal Revenue Service (IRS) allow a greater deduction because David Ortiz hit a walk-off home run?
The quick answers (given the known circumstances)? No, yes, deductible subject to a limit, and most definitely not.
The first hurdle in deducting meals and entertainment expenses (as well as travel and gifts) is substantiation. The IRS has specific rules that require such expenditures to have documentation as to the amount of the expense, the time and place of the activity, the business purpose and the business relationship to the person(s) being entertained. Once that requirement is met, we look at whether the item is fully deductible, 50% deductible, or not deductible at all.
The general rule
The deduction for M&E expenses is specifically limited to 50% for:
- MEALS – “any expense for food or beverages;” and
- ENTERTAINMENT – “any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity.”
There are a number of exceptions to the 50% limit on M&E expenses. A major exception is that M&E expenses that are primarily for the benefit of employees (and not limited to primarily highly compensated employees) can qualify for 100% deduction. These fully deductible expenses include many different social and recreational activities such as company outings, mentoring programs, employee recognition events, and annual picnics.
The other notable exception to the limitation for employee expenses is for de minimis fringe benefits. If an expense is excludible from the employee’s compensation because it is infrequent, difficult to track and minimal in value for each employee, then it is fully deductible by the employer. This allows full deductions for things like coffee provided at meetings, or large group meals for employees but only if they occur infrequently.
Other exceptions include (among others) items that are made available to the general public, and expenses that are treated as compensation.
Special additional limitations are placed on entertainment expenses that could be viewed as “excessive,” such as country club dues and skybox rentals.
Chart of examples
Please note these examples are meant to be used as guidelines. Individual facts and circumstances could produce different results.
|Example||Percent deductible||Additional notes|
|Golfing with a customer||50%|
|Lunch with a customer||50%|
|Meal expense for out-of-town travel||50%|
|Lunch provided for employees at quarterly company meeting||100%||Meets de minimis fringe benefit rule|
|Country Club Dues||0%||Social and recreational club dues are not allowed to be deducted unless included as compensation to the recipient|
|Coffee and doughnuts for meeting||100%||Meets de minimis fringe benefit rule|
|Meal for employee working overtime (if occasional)||100%||Meets de minimis fringe benefit rule|
|Ice cream social for customers||100%||Available to the general public|
|Employee retirement party||100%|
|Holiday party for employees||100%|
|M&E expenses included in employee’s Form W-2 wages||100%|
|Tickets to a Boston Bruins game with a client||50%||50% of the face value of the ticket is deductible. If tickets are purchased for more than face value (e.g. scalped), the excess is not deductible.|
|Tickets to a Boston Bruins game available to all employees||100%|
|Sea Dogs Skybox rental for one game to entertain major customers||50%||Same rule as any other tickets if only for one event.|
|Sea Dogs Skybox rental for two games to entertain major customers||50%*||* When purchasing tickets to more than one event, then Skybox tickets are limited to 50% of the face value of non-luxury box seats.
You pay $3,000 to rent a 10-seat skybox at Team Stadium for three baseball games. The cost of regular non-luxury box seats at each event is $30 a seat. You can deduct (subject to the 50% limit) $900 ((10 seats × $30 each) × 3 events).
|Tickets to a golf tournament that benefits a charitable organization||100%**||** Special rule for charities – 3 conditions must exist to be 100% deductible:
M&E expenses are often entered in one general ledger account and then the entire account is made subject to the 50% limitation on the tax return. It is possible that some, or many, of the expenses in that meals and entertainment account should be 100% deductible. In some cases it may make sense to have a tracking mechanism in place by either using a memo line in the accounting records or creating a second meals and entertainment expense account to separate out the expenses subject to limit from those that are not.
Note that travel and lodging are fully deductible – the rules described above do not apply to transportation, lodging, parking, etc. Therefore since many activities will involve both meals and travel, it is important to separate these expenses in different accounts.
Having policies and procedures in place to identify which expenses are and are not subject to limitations could lead to tax savings, by giving you the maximum deduction for the exceptions to the general rule. You want to make sure you are deducting as much of the cost of those Red Sox tickets and Fenway Franks as you can!
If you would like to discuss these matters further, please contact Adam Aucoin or your BNN advisor at 1.800.244.7444.
Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, investment, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.