20.25 50% Cost Limitation on Meals and Entertainment

You generally may not deduct the full amount of your deductible expenses for business meals and entertainment expenses, such as tickets to sports events. Unless one of the exceptions below applies, only 50% of the otherwise allowable amount for food, beverages, and entertainment is deductible. However, the deductible percentage for workers subject to the Department of Transportation’s “hours of service” limits is 80% rather than 50%.

Taxes and tips are considered part of the cost subject to the 50% limit. If your employer reimburses your expenses, the 50% limit applies to the employer.

The 50% limit applies to both employees and the self-employed. It applies to the IRS meal allowance deduction (20.4). For employee expenses the limit is taken into account on Form 2106 or 2106-EZ (if you are not reimbursed by your employer and do not claim depreciation for a business car), and on Schedule C for self-employment expenses.

Tickets.

The deductible amount for a ticket treated as an entertainment expense is generally restricted to the face value of the ticket. Amounts in excess of face value paid to ticket agencies or scalpers are not deductible. Also see the special rule for skybox rental costs below. The deductible cost of tickets is also generally subject to the 50% limitation. However, a full deduction is allowed for tickets to qualifying charitable sporting events; see Exception 7 below.

Exceptions to 50% cost limitation.

In the following cases, you may claim a full deduction for meals and entertainment; the 50% limitation does not apply:

1. As an employer, you pay for an employee’s meals and entertainment that are treated as taxable compensation to the employee and as wages for purposes of withholding of income tax.

2. You reimburse an independent contractor for meal and entertainment expenses he or she incurs on your behalf and the contractor does not adequately account for the expenses. You should report and deduct the reimbursements as compensation to the contractor, assuming the reimbursements are ordinary and necessary business expenses.

3. As an employer, you incur expenses for recreational, social, or similar activities (including facilities) primarily for the benefit of employees who are not highly compensated employees. For example, the expenses of food, beverages, and entertainment for a company-wide summer party are not subject to the 50% limit.

4. Expenses for meals and entertainment, including the use of facilities made available to the general public, such as a free concert, for advertising or goodwill purposes. For example, the IRS allowed a real-estate broker to fully deduct the cost of free dinners it provided to potential investors who attended its sales presentations. The 50% deduction limitation for meals does not apply to promotional activities that are made available to the general public. The IRS relied on the following example in a 1986 Congressional committee report for purposes of allowing a 100% deduction: A wine merchant provides customers with wine and food to demonstrate the suitability of the wine with certain types of meals. The committee report indicated that the cost of the wine, food, and other costs associated with the wine-tasting function would be fully deductible.

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Filing Tip

Meals Provided to Employees

An employer who provides meals to employees on employer premises is allowed a full deduction for all the meals provided that more than half of the employees who are provided meals are furnished them for substantial noncompensatory business reasons.

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5. Expenses for meals and entertainment sold to the public in your business, such as meal expenses if you run a restaurant, or the cost of providing entertainment if you run a nightclub. These expenses are fully deductible.

6. Food or beverage provided to your employees as a tax-free de minimis fringe benefit (3.10). This would include expenses of a cafeteria on your premises for employees where meal charges cover the direct operating cost of the cafeteria. The de minimis benefit exception allows a full deduction for all meals provided to employees on employer premises if more than half of the employees who are provided meals are furnished them for the employer’s convenience (substantial noncompensatory business purpose). If the more-than-half test is met, the meals are tax free to all the employees (3.12).

7. The price of tickets to charitable sports events (including amounts in excess of face value) provided the ticket package includes admission to the event. To qualify, a charitable sports event must: (1) be organized for the primary purpose of benefitting a tax-exempt organization; (2) contribute 100% of its net proceeds to such organization; and (3) use volunteers for substantially all work performed in carrying out the event. According to Congressional committee reports, a golf tournament that donates all its proceeds to charity is eligible to qualify under this exception, even if it offers prize money to the golfers who participate or uses paid concessionaires or security personnel. However, tickets to a college football game or similar scholastic events generally do not qualify because they do not satisfy the requirement that substantially all work be performed by volunteers.

Law Alert

Transportation Industry Workers

Individuals subject to Department of Transportation limitations on hours of service, such as interstate truck and bus drivers, pilots and other air transportation workers, and train crews, may claim a higher deductible percentage of food and beverage costs when working away from home. The deductible amount is 80% rather than 50%.

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Skybox rental costs.

A skybox is a private luxury seating area at a sports arena. Skybox seats are generally rented for the season or for a series of games such as the World Series. The deductible amount for a rental covering more than one game or performance may not exceed the sum of the face values of non-luxury box seat tickets for the number of seats in the box. The allowable amount is also subject to the 50% cost limitation. Separately stated charges for food or beverages at the skybox are deductible as entertainment expenses and are subject to the 50% cost rule. For example, assume that for two games, you paid $2,500 for a skybox containing 10 seats ($125 per seat, $1,250 per game). The cost of a non-luxury box seat ticket is $40, so 10 non-luxury box seat tickets would cost $400 for each game, or $800 for both. You may deduct 50% of the $800 non-luxury face value, or $400. If you had rented the skybox for one game, you could deduct $625 (50% of $1,250) for that skybox because the special limitation applies only where the rental is for more than one game or other performance.