Thursday, March 27, 2014

Regs on Reimbursed Meal and Entertainment Expenses Now Final

There are only slight changes in the proposed regs. Employees are not subject to the 50% reduction limit when their employer reimburses meal and entertainment expenses provided that the reimbursements are not treated as wages. Thus, the regs are aimed at the 50% limit induced under a reimbursement or similar agreement between parties other than employer and employee.

Effective date: The final regs are effective for expenses paid or incurred on or after Aug. 1, 2013, but can be applied to earlier expenses on which the statute of limitations has not expired.

General rule: The party that bears the expense generally is subject to the 50% limit. The party receiving the reimbursement treats the amount as tax free but cannot take a deduction. If the party bearing the expense includes the reimbursement in the receiving party's gross income, the recipient can deduct 100% (not just 50%) of the expense. This general rule can be changed by the parties' written agreement. Here's a review of how to determine which party is subject to the 50% limi in some cases:

Independent contractors (ICs). Generally, if your firm reimburses an IC for meal or entertainment expenses under a written agreement, your firm is subject to the 50% limit -- not the IC. But if the contract does not mention reimbursements, or if the IC fails to substantiate the time, place and business purpose of the expense, then the IC (not your firm) is subject to the limit. You can also stipulate in the agreement which party is responsible for expenses and which is subject to the limit.

When more than two parties are involved. When more than two parties are involved, the transaction should be treated as a series of two-party agreements, with each agreement separately determining who is subject to the deduction limit.

Example. LeaseCo reimburses employees for travel and meals each day the employee travels from home to a client company. LeaseCo's policy is to provide this daily reimbursement tax free, provided that employees substantiate the expenses (i.e., log the time, place and business purpose of the expense each day). LeaseCo's contract with client CorpCo states that CorpCo will reimburse LeaseCo for its employees' substantiated travel and meal expenses. The agreement does not identify which party is subject to the 50% limit.

LeaseCo employee Ed travels from home to CorpCo on 10 separate days. For each of these days, he substantiates his travel and meal expenses to LeaseCo, which sends copies of the substantiation to Corpco. Per the leasing agreement, CorpCo remits the amounts to LeaseCo along with the fee for Ed's services. LeaseCo, in turn, reimburses Ed 100% of his travel and meal expenses.

Result. Because the contract states that CorpCo must reimburse LeaseCo for Ed's substantiated travel and meal expenses, CorpCo is limited to the 50% deduction; LeaseCo can deduct 100% of ite reimbursement to Ed.

Recap: If a contract does not state which party gets the 50% v. 100% deduction, the parties' actions determine this. (T.D. 9625; 78 F.R. 46502-46504)

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