Meals and Entertainment are surprisingly under-explained.
Let’s start with the basics:
- https://www.law.cornell.edu/uscode/text/26/274 explains the basics of what can be deducted
- https://www.federalregister.gov/documents/2020/02/26/2020-03723/meals-and-entertainment-expenses-under-section-274 explains in details
- https://www.ustaxcourt.gov/UstcInOp2/OpinionViewer.aspx?ID=11982 Court Case
- Fitch v Commr. Court Case
The IRC explains the basics:
Business meals
In general, No deduction shall be allowed under this chapter for the expense of any food or beverages unless
- such expense is not lavish or extravagant under the circumstances, and
- the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages A business owner can not furnish such meals to yourself alone.
Now, let’s review in details what the Federal Register says about Meals and Entertainment expenses:
Travel Meals:
- substantiation is required for travel expenses, including food and beverage expenses incurred while on business travel away from home.
- generally disallows a deduction for expenses for travel as a form of education. No deduction is allowed under chapter 1 of the Code for travel expenses paid or incurred with respect to a spouse, dependent, or other individual accompanying the taxpayer (or an officer or employee of the taxpayer) on business travel, unless the spouse, dependent, or other individual is an employee of the taxpayer. (Reference: https://www.federalregister.gov/documents/2020/02/26/2020-03723/meals-and-entertainment-expenses-under-section-274)
- 50% Deduction
Employer-Provided Meals:
expenses for food or beverages are subject to the 50 percent limitation unless one of the six exceptions to section 274(n) in section 274(e) applies.
Section 274(e) Exceptions to Section 274(k) and (n)
Goods or services that are sold by the taxpayer in a bona fide transaction for adequate and full consideration in money or money’s worth. Section 274(e)(9) applies to expenses for goods, services, and facilities to the extent that the expenses are treated as income to a person other than an employee. (Reference https://www.federalregister.gov/documents/2020/02/26/2020-03723/meals-and-entertainment-expenses-under-section-274)
Examples Copied Directly From the Federal Register:
(1) Example 1. Taxpayer A invites B, a business associate, to a baseball game to discuss a proposed business deal. Purchase tickets for A and B to attend the game. The baseball game is Entertainment as defined in paragraph (b)(1) of this section, and thus, the cost of the game tickets is an entertainment expenditure and is not deductible by A.
(2) Example 2. Assume the same facts as in paragraph (d)(1) of this section (Example 1), except that A also buys hot dogs and drinks for A and B from a concession stand. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expenditure and is not subject to section 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game if they meet the requirements of sections 162 and 1.274-12.
(3) Example 3. Taxpayer C invites D, a business associate, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food or beverages. The basketball game is Entertainment as defined in paragraph (b)(1) of this section and, thus, the cost of the game tickets is an entertainment expenditure and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages is an entertainment expenditure that is subject to section 274(a)(1) disallowance. Therefore, C may not deduct the cost of the tickets or the food and beverages associated with the basketball game.
(4) Example 4. Assume the same facts as in paragraph (d)(3) of this section (Example 3), except that the invoice for the basketball game tickets separately states the cost of the food and beverages and reflects the regular selling price if bought separately. The basketball game is Entertainment as defined in paragraph (b)(1) of this section and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expenditure and is not deductible by C. The cost of the food and drinks, stated separately on the invoice for the game tickets, is not an entertainment expenditure. C deducts 50 % of the expenses on the food and drinks provided at the game if they meet the requirements of sections 162 and 1.274-12.
Court Case where the IRS Disallowed Meals and Entertainment (and other deductions)
The IRS disallowed deductions:
- tax preparation fees and $40,741 of the deduction for unreimbursed employee expenses.
- The disallowed employee business expenses comprise $20,334 of vehicle expenses (which petitioners determined using a standard mileage rate);
- $75 of parking fees, tolls, and local transportation expenses;
- $10,897 of travel expenses, including lodging, airfares, car rentals,
- $5,444 of miscellaneous business expenses not including meals and Entertainment;
- $2,904 of meals and entertainment expenses ($1,452 after the 50% limitation);
- $480 of union and professional association dues;
- $1,440 for a crash pad; and
- $619 for special shoes.
DONALD BURDEN AND MARY TORRES, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Court Case Analysis:
A. Vehicle Expenses
to prove by adequate records or evidence sufficient to corroborate the taxpayer’s own testimony:
(1) the amount of the expenditure or use,
(2) the time and place of the business use,
and (3) the business purpose.
The IRS disallowed a deduction for vehicle expenses of $20,334.
B. Transportation Expenses
Petitioners have failed to introduce any testimony, records, or other evidence showing payment of the claimed transportation expenses; they have failed to carry their burden of proving that such expenses were incurred or were incurred for a business purpose.
The IRS disallowed petitioners a deduction for transportation expenses of $75.
C. Traveling Expenses
Petitioners did not break the amount down, nor did they offer any bills, receipts, or other records to substantiate Pastor Burden’s domestic traveling expenses. Moreover,
they apparently did not claim a deduction for all of Pastor Burden’s traveling expenses, alleging: Days away from home on ministerial duties 100 days @ $180 per day using conservative high low method = $18,000. Petitioners? unsupported claim for some indeterminate amount of domestic traveling expense does not constitute the substantiation contemplated by section 274(d). If Pastor Burden’s travel was related to his pastoral duties, he was not entitled to reimbursement under that plan. Petitioners
have failed to substantiate adequately or otherwise prove their entitlement to deduct any amount for Pastor Burden’s 2013 domestic traveling expenses.
The IRS concluded that his traveling expenses were personal expenses and not deductible for Federal income tax purposes. See sec. 262(a); sec. 1.162-2(b)(1),
Income Tax Regs. The IRS disallowed petitioners a deduction for travel expenses of $10,897.
D. Miscellaneous Business Expenses Not Including Meals and
Entertainment
Office furniture is a capital asset, and, barring an election under section 179, petitioners were not entitled to deduct for 2013 the full cost of the furniture. See secs. 167(a), 263(a)(1)(G); Ellis Banking Corp. v. Commissioner, 688 F.2d 1376, 1379 (11th Cor. 1982). Petitioners offer nothing to satisfy the substantiation requirements for a listed property by showing business purpose and business use for the two computers. The IRS allows petitioners no deduction for the cost of either computer.
Since petitioners have not shown that they meet the requirements of sec. 280A(c)(1) for the deduction of home office expenses, the exception set forth in sec.
280F(d)(4)(B) is inapplicable here. As with his cell phone expense, the IRS allowed petitioners no deduction for internet expenses. See Venuto v. Commissioner, T.C. Memo. 2017-123, at *17. Petitioners have not produced any receipts or bills that would substantiate
their deduction of $100 for ink or paper. The IRS allowed petitioners no deduction
for ink or paper.
E. Meals and Entertainment Expenses
Petitioners have provided credit card records that show expenditures during 2013 at what appear to be restaurants. That is insufficient. To be allowed to receive a deduction for expenditure for a meal, a taxpayer must by adequate records or by sufficient evidence corroborating the taxpayer’s own statements show not only the time and place of the meal but also the business purpose. Sec. 274(d); sec. 1.274- 5(c)(2)(iii), Income Tax Regs.; sec. 1.274-5T(b)(3), (c) Petitioners credit card records
do not explain the business purpose of the meals charged or how the expenditures relate to Pastor Burden’s employment.
The IRS allowed petitioners no deduction for meals or Entertainment.
F. Union Dues and Professional Association Dues
Petitioners failed to provide any testimony, records, or other evidence sufficient to substantiate that they paid any union dues and professional association dues during 2013. The IRS allowed petitioners no deduction for such dues.
G. Crash Pad
The taxpayer’s additional living and traveling expenses are a result of personal choice and are not ordinary and necessary business expenses. Tucker v. Commissioner,
55 T.C. 783, 786 (1971). The IRS did not allow petitioners a deduction for any crash pad expenses incurred in 2013.
H. Special Shoes
Because petitioners have failed to offer any evidence of the business need for the shoes or that any amount was paid for shoes in 2013, the IRS allowed no deduction for the $619 claimed spent for special shoes.
I. Tax Preparation Fees
Petitioners are entitled to deduct tax preparation fees of $200 under section 212(3).
J. Accuracy-Related Penalty
The taxpayer may be subject to an accuracy-related penalty for an underpayment attributable to, among other things,
negligence or disregard of rules or regulations or a substantial understatement of
income tax.
Reference: https://www.ustaxcourt.gov/UstcInOp2/OpinionViewer.aspx?ID=11982
Business Meals with Spouses
In the court case Fitch v Commr., the IRS didn’t allow business deduction of meals with a spouse because the petitioners have not met their burden of proving that the spousal meals are ordinary and necessary business expenses.
Limited descriptions of why spousal meals are necessary are not sufficient enough to substantiate a business purpose.
Also, the taxpayers were responsible for an accuracy-related penalty.
Reference: https://taxpayeradvocate.irs.gov/2013-Annual-Report/downloads/Most-Litigated-Issues.pdf
Also see John D. MOSS, Jr. and Diane C. Moss v. COMMISSIONER OF INTERNAL REVENUE
When the IRS sends out CP2000 letters, they explain in detail what the taxpayer needs to do to resolve the issue.
CP2000 proposes a tax due, and the taxpayer either agrees or disagrees with the proposed tax liability. The taxpayer needs to respond within 30 days. If the taxpayer doesn’t respond within 30 days or if the IRS can’t accept what the taxpayer included as additional information, the IRS will send CP3219A Statutory Notice of Deficiency. This notice will also provide detailed steps of what steps the taxpayer needs to take to resolve it.
It may take months or even years after you file your tax return and before you receive the notice. Don’t think that once you filed everything and the IRS issued you a refund- they had no problem with what you entered in your tax return. The IRS doesn’t work as fast as you think. Although, their machines still work and match taxpayers’ income to find errors.
What we can do to help taxpayers avoid receiving painful CP2000 letters?
We can monitor transcripts and timely tell the taxpayer if there is a problem with their tax return. If that’s the case, the problem can be timely addressed, which prevents CP2000 and in some cases even an audit. Contact us for more details.
BURDEN v. COMMISSIONER OF | T.C. Summary Opinion …. https://www.leagle.com/decision/intco20190624g47
https://www.bradfordtaxinstitute.com/Endnotes/Prop_Reg_1_274-11b1i.pdf
