Preface: “Food is our common ground, a universal experience.” –James Beard
Deduction for Meals and Incidental Expenses Paid to Leased Employees
Generally, a taxpayer’s deduction for business meal expenses, including reimbursed amounts, is limited to 50 percent of the expenses paid during the tax year (80 percent in the case of certain individuals subject to the Department of Transportation’s “hours of service” limits). However, the limitation does not apply if the expenses are paid in connection with the performance of services for another person under a reimbursement or other expense allowance arrangement.
In the case of an employee, the exception to the limit only applies to the extent the reimbursement is not reported and deducted as compensation paid by the employer. In the case of an independent contractor, the exception to the limit applies only to the extent the independent contractor substantiates the reimbursed expenses to the payor.
In applying these rules to amounts paid to leased employees for meal and incidental expense, the IRS has agreed that the limit should apply to the party that ultimately bears the per diem expense. Thus, if an employee or independent contractor incurs meals and incidental expenses in connection with the performance of services for another person and is not reimbursed, then the limit applies to any deduction claimed by the employee or independent contractor. However, if an employee or independent contractor accounts for the expenses to a leasing company, is reimbursed under an allowance arrangement, and the payment is treated as compensation, then he or she is not subject to the limit. Instead, the leasing company bears the expense and is subject to the limit.
On the other hand, a leasing company will not be subject to the limit if, in connection with its performance of services for a third party, it is reimbursed under an allowance arrangement with the third party, and accounts to the third party in the same manner that the employee accounted for the expenses. In such circumstance, the third party bears the expenses and is subject to the limit for the deduction that it claims.
If you would like more information on how this is relevant to your business, or if you would like to discuss your employee meals reimbursement plan, please call our office at your convenience.