Where Are You Recording Expenses for Your Company Party?
By Jimmy Forbes, Partner, Tax & Business Services
Whether your business is planning a summer employee picnic or the annual holiday party, you are likely to incur significant costs to cover everything from meals and entertainment. While the Internal Revenue Code allows for only 50% of meals and entertainment to be deducted under the general rule, there are several statutory exemptions that allow for a full 100% deduction for qualifying meals and entertainment.
- Expenses related to recreational, social, or similar activities incurred primarily for the benefit of employees. Employee parties and company picnics fall into this category. However, expenses solely for the benefit of officers or major shareholders would not meet the qualification and would be subject to the 50% limitation.
- Business meetings. Bona fide business meetings of a company’s employees, stockholders, or directors held principally for the discussion of business. Examples would include a shareholder meeting for the election of directors or the expense of meals provided to employees to instruct them in a new business procedure. The exception does not apply to meeting or convention of employees for the principal purpose of rewarding them for their service.
- On premises food and beverage for employees. The food supplied in an employee cafeteria would qualify even though guests may occasionally be served in the cafeteria.
- Expenses included in income of persons who are not employees. For example, your company holds a drawing and awards a dinner cruise to a customer and the customer is issued a Form 1099.
- Expenses for meals treated as taxable compensation to employees. These could include employer paid vacations, including meals, that are included in the employees W-2 or reimbursement of meals during a job-related move that is included as compensation.
- Expenses for items made available to the general public. For example, popcorn or snacks offered at a car dealer. This exception also applies when meals are provided to potential customers as part of a sales presentation provided it is not an invitation only and open to the general public. A timeshare sales presentation that is available to the general public would be allowed a full deduction for meals provided.
- Expenses for meals and entertainment sold by the company for adequate compensation. This exception prevents the disallowance when meals are sold such as by restaurants or daycare providers.
- Expenses excludable as a de minimis fringe benefit. For this exception to apply, it must be unreasonable or administratively impractical for the company to account for the value of the fringe benefit. For example, coffee provided by the employer at the office.
- Reimbursed expenses. Meals and entertainment expenses incurred by a company that are reimbursed by the customer. For example, if you charge a customer for your hours worked plus all related expenses, including meals, the 50% disallowance does not apply. The company should make it clear on their invoice the portion of their fee that is reimbursement for meals to prevent both parties from claiming a 100% deduction for the expense.
The exceptions to the general rule are often overlooked. By carefully reviewing your meals and entertainment expenses, you could save your company significant tax dollars. So enjoy your company party, and make sure you have it properly recorded on your books to get the full tax deduction.