Tax Court Approves 100% Business Meal Deduction

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30 Oct Tax Court Approves 100% Business Meal Deduction

Many business owners, self-employed individuals, and other taxpayers are aware that business meals and entertainment expenses are only 50 percent deductible. You might treat a key client to a restaurant meal and spend $100. Even if this meal has a definite business purpose (you wind up with an important contract), only $50 will be tax deductible.

Nevertheless, some business meals can be fully deductible. The Tax Court recently overruled the IRS in a case regarding the pro hockey team, the Boston Bruins (Jacobs v. Commissioner, 148 T.C. No. 24, 6/26/17). Although the IRS claimed tax deficiencies totaling about $85,000 over two years’ tax returns, the court sided with the team’s owners and allowed 100% deductions for meal costs.

Pregame preparation

As is the case with most professional sports teams, the Bruins play half of their games away from home. National Hockey League rules require teams to arrive well in advance, so the Bruins schedule hotel rooms for the players and other traveling employees. These hotel arrangements include the provision of rooms where meals are served, with specified menus, before the games.

All traveling employees are entitled to eat meals there at no personal cost. The players are required to eat there, on time, because considerable game planning occurs at these meals between players and coaches.

The Tax Court noted that the meal service was non-discriminatory, as all traveling hockey employees could attend. Moreover, the meal expenses were associated with the active conduct of the taxpayer’s trade or business: winning hockey games.

The Bruins argument

The Bruins argued that the meals were 100 percent deductible, because the costs of the meals were excepted from the 50 percent meals and entertainment limitation because they were de minimis fringe benefits.

Five tests

The court found that the meals would qualify as de minimis fringe benefits if they were provided in a non-discriminatory manner and five other tests relating to the meal were met:

  1. The eating facility is owned or leased by the employer
  2. The facility is operated by the employer
  3. The facility is located on or near the business premises of the employer
  4. The meals furnished at the facility are provided during, or immediately before or after, the employees’ workday
  5. The revenue or operating cost test is passed; (this last point will be satisfied if the meals are furnished for the employer’s convenience on the employer’s business premises)

The court found that the team furnished the meals in a non-discriminatory manner because it provided the meals to all traveling hockey employees. After analyzing the evidence presented, the court decided the meals met the five tests. Consequently, it held that the costs of the meals were 100 percent deductible as de minimis fringe benefits not subject to the 50 percent meals and entertainment limitation in IRC Section 274(n)(2)(B).

Key takeaways

Although professional sports teams operate a very specialized business, the Tax Court’s reasoning in this case may apply to other situations, especially in sports and entertainment industries in which employees are provided meals away from home as part of their work schedule.

In addition, this decision can be a reminder that certain meal expenses can be 100 percent deductible. For example, employers might be entitled to deduct the full cost of food and drink at events primarily for the benefit of rank and file employees. Those occasions could be holiday parties, company outings, banquets, and so on. Also, meals, snacks, and beverages provided to employees at no charge, on or near the firm’s premises for valid business purposes, may be 100 percent deductible.

We can help you structure employee benefits of this nature so that your business will meet the requirements for full tax advantages.

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