August 6, 2020

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August 06, 2020

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Are the Meals You Provide to Your Employees Fully Deductible?

Most businesses know that the tax code generally allows them to deduct from income all “ordinary and necessary” expenses incurred in running the business. But when it comes to deducting expenses for meals and entertainment, they might be surprised to learn that the code is much stingier. It allows taxpayers to deduct just 50 percent of expenses incurred for meals and entertainment, unless an exception applies.

And a recent decision by the U.S. Tax Court shows just how broad one of those exceptions could be. Jacobs v. Commissioner, 148 T.C. No. 24 (June 26, 2017), involved a challenge to the Internal Revenue Service's (IRS) disallowance of 50 percent of the deductions claimed by the owner of the National Hockey League’s Boston Bruins for providing meals to the players, coaches, and other team employees at hotels where the club stayed when the Bruins played on the road. Jacobs argued that those costs fell within the “de minimis fringe” exception to the 50 percent limitation, and were 100 percent deductible.

In a fully reviewed decision, the Tax Court sided with the Bruins, and allowed Jacobs to deduct 100 percent of the cost of those meals. The court found in favor of the Bruins on the major points in dispute:

  1. The “meal rooms” where the away-city hotels provided meals to Bruins employees were “owned or leased” by the employer, because the Bruins negotiated the provision of those rooms as part of its agreement to lodge the players and team staff at the hotel.

  2. The meal rooms in the away-city hotels qualified as the Bruins’ “business premises” for purposes of the exception.

  3. The out-of-town meals were provided “for the convenience of the employer.” On that point, the court ruled that the away-city hotels “were vital to the Bruins’ business objective of winning hockey games,” and refused to second guess the club’s business judgment.

© 2020 Schiff Hardin LLPNational Law Review, Volume VII, Number 193

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About this Author

Virtually no business or investment activity is free from federal and state tax considerations and pitfalls. Schiff Hardin's tax attorneys advise clients on the tax aspects of the formation, financing, operation and termination of their business activities, and in the structuring of their investments.

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