The IRS released final regulations addressing the tax implications of work related expense reimbursements. Proposed regulations were issued last year, and the final regulations adopt the proposed rules without substantive changes. The final regulations apply to expenses paid or incurred in taxable years beginning after August 1, 2013.
The rules affect taxpayers who receive from their employers advances, allowances or reimbursements for work-related entertainment expenses.
Section 274(n) of the Internal Revenue Code limits the amount of entertainment expenses that are deductible. Generally, reimbursement of a meal and entertainment expense is limited to 50% of the expense incurred. Employers are not subject to the limitation if they treat the expenses as compensation to their employees.
There are exceptions to the limits on reimbursed expenses. The limitations do not apply to expenses that a taxpayer pays or incurs when performing services for another person under a reimbursement or expense allowance arrangement where the employer does not treat the reimbursement as compensation to the employee. In this case, the employee does not have to recognize additional compensation to the extent the entertainment and meals are related to work duties, and the employer may deduct the expense. However, the employer is subject to the 50% deduction limit.
If the employer treats the cost of the meal or entertainment as compensation to the employee, the employee may deduct the expense as a business expense, but the employee may be subject to the deduction limit (the employer’s deduction would be as compensation, and not subject to the deduction limit).
The final regulations clarify what will be considered a “reimbursement or other expense allowance arrangement” for Internal Revenue Code purposes. The regulations also address the application of the meal and entertainment expense deduction rules as they apply to independent contractors and when there are multiple parties involved with the reimbursement.
Employers may wish to contact their accountants to make sure they are treating meal and entertainment expense reimbursements correctly under the final regulations.
