Take Advantage of Tax Deductions for Company Events
When it’s time to host a party for your employees, it’s also a good time to think about potential tax saving opportunities associated with these events. Since you will likely be incurring significant costs to cover everything from meals to entertainment, it’s smart to maximize your deductions in this area. 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. Those exemptions include:
- 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 for 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 while offering them instruction that covers a new business procedure. The exception does not apply to meetings or conventions 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 employee’s 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 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 by entities such as 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, so make sure you pay close attention when reviewing meal and entertainment expenses. Next time you are enjoying the company event, have the peace of mind that you are saving significant tax dollars when you properly record your expenses to achieve maximum tax benefits.
For more information about the above article or any business services, please contact Melissa Motley, CPA, at (334) 887-7022 or by leaving us a message below.
