Reimbursed Entertainment Expenses

Post Date: 8/9/13
Last Updated: 8/9/13

Summary

Cross References
- IRC §274(e)(3)
- T.D. 9625

On Thursday, August 1, 2013, the IRS issued final regulations regarding the exception to the deduction limitations on certain expenditures paid or incurred under reimbursement or other expense allowance arrangements.

Under IRC section 274(a), no deduction is allowed for the use of an entertainment facility. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a resort. However, the cost of entertaining a client or customer at such a facility is deductible provided the entertainment meets the ordinary and necessary test for business expenses in general.

Under IRC section 274(n), a deduction for meals and entertainment is generally limited to 50% of the expense (80% for workers subject to the U.S. Department of Transportation hours of service rules).

Proposed regulations issued by the IRS had previously clarified which party is subject to these limitations (REG-101812-07). In general, when one party reimburses another party, the one who ultimately bears the expense is the one subject to the limitations. The final regulations use the term payor to clarify that the rules relating to reimbursement and other expense allowance arrangements with employees do not require determining who the common law employer is. The rules require identifying only the party that bears the expense. Thus, the regulations are not limited to employers but encompass any party that reimburses an employee’s expenses under a reimbursement or other expense allowance arrangement.

For a reimbursement or other expense allowance arrangement involving persons that are not employees (such as independent contractors, clients, or customers), the parties may expressly identify the party subject to the IRC section 274(a) and 274(n) limitations. If the agreement does not specify a party, the limitations apply to the client if the independent contractor substantiates the expense to the client, and to the independent contractor if the independent contractor does not substantiate the expense to the client.

The final regulations apply to expenses paid or incurred in taxable years beginning after August 1, 2013. Taxpayers may choose to apply these regulations to expenses paid or incurred for all prior years where the statute of limitations has not yet expired.
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