Update on 50% Limit on Deductible Meal and Entertainment Expenses

Last month, the IRS declared final ruling on which party is subject to the 50% limit on deductible meal and entertainment expenses under Sec. 274(n) (T.D. 9625). According to the AICPA, it has decided to adopt the proposed regulations issued in July 2012. Before the proposals were introduced, only one party was subject to the limitation, causing controversy when multiple parties were involved. The AICPA explains that “Sec. 274(a) limits the amount of entertainment expenses that are deductible, and deductions for meals and entertainments are generally limited to 50% of the expenses incurred.”

However, there are two exceptions from the Sec. 274(a) limits for reimbursed expenses. According to the IRS, “Sec. 274(e)(3)(A) excepts expenses a taxpayer pays or incurs in performing services for another person under a reimbursement or other expense allowance arrangement where the employer does not treat the reimbursement as compensation to the employee.” The other exception, Section. 274(e)(3)(B), applies if the taxpayer performs services for a person other than an employer and the taxpayer accounts to that person.

For more information on these regulations, please visit the AICPA website.