Statistical sampling can increase M&E deductions.

• Author: Ebner, Joshua C.
• Position: Meals and entertainment

One problem that taxpayers face in claiming allowable expense deductions is the administrative costs required to properly account for them. Although the Code allows a taxpayer to deduct certain expenses incurred, to properly account for deductions, the taxpayer may have to sustain an economic cost much greater than the economic benefit. This cost benefit disparity is problematic, because it may prevent taxpayers from following the law as intended. One area in which this problem exists is meals and entertainment (M&E). Although a majority of M&E is subject to a 50% limit, exceptions permit 100% deductibility. In an effort to facilitate the accounting for fully deductible M&E, the IRS issued Rev. Proc. 2004-29, which establishes guidelines for using statistical sampling methods to account for these expenses, whether in an original return, under examination, in litigation or in making a refund claim.

Deduction Limits

Sec. 162 allows a deduction for all ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business. For M&E, See. 274(n)(1) limits the deductible amount to 50%. However, this does not encompass all M&E; the following are not so limited:

* Expenses treated as compensation to an employee (Sec. 274(e)(2));

* Expenses related to food and beverages excludible under the de minimis fringe benefit rules (See. 274(n)(2)(B));

* Expenses covered for events that revolve a ticket (Sec. 274(n) (2) (C));

* Expenses for taxable payments or reimbursements for moving expenses (Sec. 274(n) (2) (D)); and

* Expenses for food or beverages that Federal law requires to be provided to crewmembers of certain vessels and oil platforms (Sec. 274(n)(2)(E)).

For taxpayers that incur high M&E expenses, the task of separately accounting for 100% deductible expenses often becomes administratively and economically prohibitive. Previously, the IRS denied taxpayers the use of a statistical sampling method to remedy this problem. However, it finally issued Rev. Proc. 2004-29, which not only permits the use of statistics, but also explains sampling standards that allow uniformed sampling. By using statistical sampling, the taxpayer can take deductions without recurring costs in excess of the related tax benefit.

Coordination with Sec. 132

Perhaps the most common 100% allowable M&E expense is the exception for de minimis fringe benefits. Although Rev. Proc. 2004-29 allows the use of statistical sampling, an analysis of de...