LIMITATION RULE FOR M & E
is not subject to the 50% limitation and is fully deductible for tax purposes.
to implement new safety procedures is 100% deductible.�
employee's income, and therefore exempted from the 50% deduction limit.
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| EXCEPTIONS TO THE 50% LIMITATION RULE FOR M & E |
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| Generally, the amount allowable as a deduction for meal and entertainment (M & E) expenses is limited to 50% of such expenses.� However, there are several exceptions to the 50% limitation on deductible M & E expenses.� If a company's M & E expenses are one of the exceptions, they are 100% deductible. | |||||||||||||||||||
| One exception to this limitation is expenses for the recreational, social, or similar activities, primarily for the benefit of non-highly compensated employees.� Highly compensated employees for this purpose include 10% or greater owners in the business.� | |||||||||||||||||||
| Illustration:� The cost of a Christmas party, annual picnic, or summer outing for employees and their families is not subject to the 50% limitation and is fully deductible for tax purposes. |
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| It should be noted, this exception does not apply for the rule disallowing the deduction for dues paid for membership in a club organized for business, pleasure, recreation, or other social purpose. | |||||||||||||||||||
| Another exception to the 50% tax ceiling is expenses directly related to the business meetings of employees, stockholders or directors. | |||||||||||||||||||
| Illustration:� The cost of snacks and drinks at a board of directors meeting, or a meeting for employees to implement new safety procedures is 100% deductible.� |
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| Meals are not subject to the 50% limit if they are excludable from the recipient's income as a de minimis fringe benefit under Internal Revenue Code (IRC) section 132(e).� One example that meals may be excluded as a de minimis fringe benefit is dinner or dinner money provided occasionally so that employees can work overtime. | |||||||||||||||||||
| Illustration:� The expenses for food provided for employees who work late are excluded from the employee's income, and therefore exempted from the 50% deduction limit. |
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| In order to take advantage of this tax planning opportunity I recommend establishing two M & E accounts; one for expenses limited to the percentage limitation and another for the exceptions to this limitation.� This will allow for proper recording of M & E expenses throughout the year, instead of year-end adjustments.� In addition, the accounting staff should be properly trained to recognize which M & E expenses are 100% deductible. | |||||||||||||||||||
| The added tax savings by implementing two M & E accounts should outweigh any costs incurred in establishing and maintaining this new system. | |||||||||||||||||||
| Author - Gregory H. Lackey, CPA | |||||||||||||||||||
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