Prop. Regs. provide guidance on meals and entertainment expenditures.

• Author: Cohen, Andrew

Deductions for meals and entertainment expenditures are generally limited to 50% of the actual expense incurred, per Sec. 274(n). However, who is allowed to deduct the expenditures and, in turn, is subject to the limitation, can be complicated for expenditures incurred while performing services for another individual under a reimbursement arrangement.

An exception under Sec. 274(e)(3) requires the limitation to be applied to the person who actually bears the expense when an individual pays or incurs expenditures for meals and entertainment while performing services for someone else under a reimbursement or other expense allowance arrangement.

This exception is often applied in an employer/employee relationship, but it also applies to independent contractors and other nonemployees. The IRS recently issued proposed regulations (REG-101812-07) that clarify the definition of a reimbursement or other expense allowance arrangement and provide guidance on the applicability of the Sec. 274(e)(3) exception under various circumstances including employer/em-ployee, two-party, and multiparty arrangements. Although the effective date of these regulations is on or after the date they are published as final, the IRS noted that taxpayers may currently rely on them.

Reimbursement or Other Expense Allowance Arrangement Defined

The proposed regulations adopt the position taken in Rev. Rul. 2008-23 that for purposes of Sec. 274(e)(3), reimbursement or other expense allowance arrangements include, but are not limited to, accountable plans as defined in Sec. 62(c). Under the proposed regulations, a reimbursement or other expense allowance arrangement involving employees is an arrangement under which an employee receives an advance, allowance, or reimbursement from a payer (the employer, its agent, or a third party) for expenses the employee pays or incurs in performing services as an employee. A reimbursement or other expense allowance arrangement involving persons that are not employees is an arrangement under which an independent contractor receives an advance, allowance, or reimbursement from a client or customer for expenses the independent contractor pays or incurs in performing services if either (1) a written agreement between the parties expressly provides that the client or customer will reimburse the independent contractor for expenses that are subject to the deduction limitations, or (2) a written agreement between the parties expressly identifies the...