United States

Pregame away meals ruled not subject to 50 percent deduction limit

Exception met for meals furnished for the convenience of the employer


The general rule under section 274(n) is that a taxpayer may only deduct 50 percent of meals and entertainment (M&E) expenses. ‘Meals’ are defined as food or beverages and ‘entertainment’ is defined as "any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with such activity." These definitions are intentionally broad, but there are numerous exceptions to the general rule and certain meals and entertainment expenses are 100 percent deductible.

Companies that do not review the tax treatment of their M&E expenses will miss out on exceptions to the 50 percent rule of expenses that should be treated as 100 percent deductible, such as employee de minis fringe benefits.

Exception for meals furnished for the convenience of the employer

Section 119(a)(l) provides an exclusion from compensation income for the value of any meals furnished to employees for the convenience of the employer if the meals are furnished on the business premises of the employer. Meals that are excludable under section 119 are also excludible as a de minimis fringe benefit, and therefore, are fully deductible to the employer. However, in order to be fully deductible, the meals must satisfy the relevant requirements of section 132. Section 119(b)(4) also provides that if more than one-half of an employer's employees are furnished meals that qualify under section 119(a) then all meals furnished on the business premises of the employer are treated as if they were furnished for the convenience of the employer. This in essence means that the employee has no compensation income from the meals and the employer is entitled to a 100 percent deduction.

Meals furnished by an employer without charge to the employee are regarded as furnished for the convenience of the employer if such meals are furnished for a substantial non-compensatory business reason. Generally, the determination of whether there is a substantial non-compensatory business reason is based on the facts and circumstances. Examples of meals provided for the convenience of the employer include the need to be ‘on call’ for emergencies, a restriction to a short meal period, or the inability to secure proper meals within a reasonable period of time.

Results of recent tax court case

In the recent Tax Court case, Jeremy M. Jacobs v. Commissioner, 148 TC —, No. 24,  the Boston Bruins, a professional hockey team, was allowed to deduct the entire cost of pregame meals for players and personnel at away games because the meals qualified as de minimis fringe benefits.

The team lodged in hotels while they were out of town for away games. While lodging at hotels the team also rented rooms to conduct team business and serve meals. These separate facilities were operated by the team under contract with the hotel in order to provide eating facilities for its employees. The team held pregame meetings in these facilities at which they also served the meals. The pregame meetings were mandatory and included review of game films, discussions between players and coaches, meetings with public relations staff and meetings among coaches, management and trainers. These functions were essential to the business purpose of winning hockey games and could not be conducted at the home team’s arena because of space limitations. These meals were provided to the player employees to improve nutrition and performance, which were considered to be noncompensatory business reasons. The meals, therefore, were ruled by the Tax Court to qualify as meals furnished for the convenience of the employer and de minimis fringe benefits and, as such, were not subject to the 50 percent limitation on business meals.

The holding’s impact could be felt in other industries as well, potentially in situations when an employer might congregate its employees in a remote location for a good business reason, such as annual meetings, sales meetings and training events. Companies who want to lease a conference setting for their employees for a mandatory meeting in a location away from the home office to discuss business issues should consider applying the five-part test of section 132(e) required to qualify for the exception. The Tax Court held that the eating facilities were leased by the employer, the facilities were operated by the employer, the facilities were located near the employer’s business premises, the meals were provided during or immediately before or after the workday, and the annual revenue from the facility equaled or exceeded direct operating costs. The last part of the test was satisfied because the meals were provided free of charge and excluded from income to all employees under section 119.

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