Final Regs Clarify Application of 50-Percent Deduction Limit for Meals to Multi-Party Arrangements (article)

Final Regs Clarify Application of 50-Percent Deduction Limit for Meals to Multi-Party Arrangements (article)

The IRS has issued final regs to clarify who is subject to the 50-percent limit on meal expense deductions under Code Sec. 274 – the employer or employee leasing company, the employee, or a third-party client. The regs permit the parties to determine who is subject to the 50-percent limit. If there is no agreement, the 50-percent limit applies to the party who pays the expenses under a reimbursement arrangement.

Background

Code Sec. 274(a) impose deduction limits on various business expenses, including meals. Code Sec. 274(n) limits the deduction to 50 percent. However, Code Sec. 274(e)(3) provides exceptions for certain reimbursed expenses.

Comment: The exception is only available to one party to the reimbursement arrangement; therefore, the deduction limitation will still apply to the other party to the arrangement.

Code Sec. 274(e)(3) exceptions

The exception applies to expenses paid by a taxpayer who provides services to another person under a "reimbursement or other expense allowance arrangement" with the other person.

In a two-party arrangement, the services may be performed for an employer. The exception applies if the employer does not treat the reimbursed expenses as compensation to the employee. The employee has no compensation or deduction, and is not subject to the deduction limit. The employer deducts the expense and is subject to the deduction limits.

In a three-party arrangement, services are provided to a person other than an employer (such as a customer or client). The exception applies if the customer/client reimburses expenses to the service provider (here, an independent contractor such as an employee leasing company), and the service provider accounts for the expenses to the client. The deduction limits do not apply to a service provider who substantiates the expenses. Instead, the limits apply to the client. If the service provider fails to substantiate the expenses, the deduction limits apply to the service provider, not the client.

Reimbursement arrangement

The final regs define a reimbursement or other expense allowance arrangement under Code Sec. 274(e)(3). The rules apply to arrangements between payors and employees, whether or not the payor is an employer. A client or customer may also be a payor of the reimbursement arrangement. Therefore, any party that reimburses an employee is a payor and bears the expense (and the deduction limitation) if the payment is not treated as compensation to the employee.

The final regs provide that a reimbursement arrangement may be between an independent contractor (such as an employee leasing firm) and a client or customer. The parties may enter into an express agreement that identifies the party subject to the deduction limitation. If there is no agreement, the deduction limits do not apply to an independent contractor that accounts to the client; they apply to the client. If there is no agreement and the independent contractor fails to account to the client, the limits apply to the independent contractor.

Under the regs, a multi-party reimbursement arrangement is analyzed as a series of separate two-party arrangements. In this situation, an employee pays the expense, the employee is reimbursed by another party (the initial payor), and a third party reimburses the initial payor.


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Final Regs Clarify Application of 50-Percent Deduction Limit for Meals to Multi-Party Arrangements (article)The IRS has issued final regs to clarify who is subject to the 50-percent limit on meal expense deductions under Code Sec. 274 – the employer or employee leasing company, the employee, or a third-party client. The regs permit the parties to determine who is subject to the 50-percent limit. If there is no agreement, the 50-percent limit applies to the party who pays the expenses under a reimbursement arrangement....2013-08-13T18:43:00-05:00The IRS has issued final regs to clarify who is subject to the 50-percent limit on meal expense deductions under Code Sec. 274 – the employer or employee leasing company, the employee, or a third-party client. The regs permit the parties to determine who is subject to the 50-percent limit. If there is no agreement, the 50-percent limit applies to the party who pays the expenses under a reimbursement arrangement.