Entertainment expense deduction & substantiation

Business entertainment

Many business owners and associates meet with clients at a restaurant or other entertainment venues with the purpose of conducting business. These entertainment expenses are generally allowed as deductions (limited to 50%), and are governed by the following Internal Revenue Code Sections (Prior to the New Tax Cuts and Jobs Act):

  • IRC 162(a): requiring that an item needed to be both ordinary and necessary in order to be deducted as a business expense
  • IRC 274: requiring that this entertainment item is properly substantiated
  • IRC 132(e): provides a De Minimis Fringe Exception for entertainment expenses incurred for the convenience of the employer to be consumed on the premises

In order to provide substantiation that entertainment expense is both ordinary and necessary, one must follow the rules outlines in IRC 274. Each entertainment item over $75 must have the following substantiation information in writing:

  • Amount and proof of payment
  • Time and place
  • Business purpose and benefit
  • Attendee(s) and their business relationship to the business

IRC 274 further provides an exception to the proof of payment requirement should entertainment expense be less than $75. However, all other elements of substantiation must still be maintained.

With regards to entertainment expenses incurred while travelling, IRC 274-5(j) allows the use of a “per diem method” for substantiation purposes. This is commonly known as the “Conus rates”, and the list of expenses for each major location within and without the United States is published and maintained by the U.S. General Services Administration. Proof of travel is required to use this substantiation method.

IRC 132(e) allows a 100% deduction for “any property or service, the value of which is (after taking into account the frequency with which similar fringes are provided by the employer to the employers’ employees) so small as to make accounting for it unreasonably or administratively impracticable.

While full written substantiation is the best defense in the case of an audit, one should weigh both the costs of benefits of doing so.

In the event your substantiation documentation is unavailable through no fault of your own (acceptable examples of these circumstances include fire, flood or natural disaster), you have the right to “substantiate claimed deductions by reasonable construction of the expenditures or use” – this is otherwise known as the Cohan rule.

The use of the De Minimis Fringe Benefit rule (IRC 274(n)(2)(B)) was successful in a June 26, 2017 Tax Court Case brought by the owners of the Boston Bruins against the IRS. (GO BRUINS!!) This case revolved around deducting the entire cost of pregame meals for players and personnel at away games. While I won’t bore you the with details, suffice to say that the IRS closely examines the entertainment deduction and it behooves you to adhere to the substantiation requirements.

Enjoy your Entertainment Deduction!

 

 

Thomas D. Terranova, Jr., CPA, PFS, CITP is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Jit Lee Billings, CPA is managing member of Terranova & Associates, LLC and member of the AICPA and MA Society of CPA’s.

Terranova & Associates, LLC is located in Danvers and contact be contact at 978-774-7700 for consultations.

Posted by JitLeeBillings

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