Exceptions to limitation on meal and entertainment expenses.

• Author: Seitter, Tripp

Many taxpayers account for their meal and entertainment expenses in a single expense account. The expenses included in this account may then be fully subjected to the percentage limitation of Sec. 274(n)(1). Certain types of meal and entertainment expenses are specifically excluded from the limitation under Sec. 274(n)(2) and are therefore fully deductible. Some of the more frequently encountered exceptions include:

* De minimis fringe benefits: Occasional meal allowances or meals provided on the employer's premises (e.g., for overtime work or staff meetings) may be fully deductible as a de minimis fringe benefit. Also, coffee and doughnuts occasionally furnished to employees would not generally be subject to the percentage limitation.

Meals provided to employees at an employer-operated eating facility may also come under this exception if (1) the facility is owned or leased by the employer; (2) the facility is on or near the business premises; (3) meals furnished at the facility are provided during or immediately before or after the employee's workday; (4) revenue from the facility equals or exceeds direct operating costs; and (5) access to the facility is nondiscriminatory.

* Traditional recreational and social activities for employees: Expenses for holiday parties and other recreational events (such as picnics, going-away parties and firm dinners) are not limited. This exception also includes the cost of maintaining a swimming pool, bowling alley or other athletic facility. Expenditures of this type are not subject to the 50% limitation if provided primarily for the benefit of employees other than highly compensated employees (as defined by Sec. 414(q)).

* Meals and entertainment made available to the general public: Samples of food or entertainment given away on a promotional basis to the general public are not subject to the percentage limitation. The costs of providing entertainment or amusement to the general public by means of television or radio, for example, fall within this exception, as do expenditures for distributing samples to the public. Thus, a wine merchant who permits potential customers to sample wine that he is offering for sale may deduct in full the cost of wine used in a sample, along with the reasonable costs associated with the wine tasting (e.g., food that is provided to demonstrate the suitability of the wine for particular types of meals).

A recent letter ruling indicates that the IRS's interpretation of...