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Lev
Lev, Tax Advisor
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Alice, the chair of the School of Accountancy entertains the

Resolved Question:

Alice, the chair of the School of Accountancy entertains the faculty at her home each semester and has a holiday party at the end of December for the faculty and their families. When a faculty member is promoted or has a paper published in an exceptionally prestigious journal Alice hosts a "social hour" at her house. She also sponsors a picnic for the faculty and graduate students at the start of the Fall semester to let them get aquainted with each other. To what extent are these expenses deductible? What IRC is applicable?
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Entertainment expenses that are both ordinary and necessary in carrying on a trade or business may be deductible if they meet one of the two tests:



  • The Directly Related test, or

  • The Associated test


You must have records to prove the business purpose (under the applicable test) and the amount of each expense, the date and place of the entertainment, and the business relationship of the persons entertained. Generally, only 50% of food and beverage ("meal") and entertainment expenses are allowed as a deduction.
If your expenses exceed the reimbursement you received under an accountable plan, if you were reimbursed under a nonaccountable plan, or if you are not reimbursed at all, you can use Form 2106 (PDF), or Form 2106-EZ (PDF) to deduct employee business entertainment expenses that otherwise qualify as deductible expenses. Unreimbursed expenses, and expenses that exceed reimbursement under an accountable plan are carried over to Form 1040, Schedule A, and are generally subject to the 2% of adjusted gross income limit.
Section 162(a) allows a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including certain expenses for meals and entertainment.
Section 274(n)(1) provides that the amount allowable as a deduction for any expense for food or beverages, or any item with respect to an activity that is of a type generally considered to constitute entertainment, amusement, or recreation, or with respect to a facility used in connection with these activities, may not exceed 50% of the amount of the expense.

Customer:

Thank you; this is part of a research project for grad school. The unknown is whether the expenses are reimbursable from her employer.

Customer:

You wouldn't know of any Revenue Rulings or cases in which these or similar issues were addressed?

LEV :

If you are an employee whose deductible business entertainment expenses are fully substantiated and reimbursed under an accountable plan, the reimbursement should not be included in your wages on Form W-2 and you should not deduct the expenses.

LEV :

See for instance this Rev. Proc. 2004-29 - http://www.irs.gov/file_source/pub/irs-drop/rp-04-29.pdf

Customer:

I think you've given me a great deal to go on! Thank you so much for all your help! If you think of any actual tax court cases or appellate court cases that I could add to my project please let me know :)

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22776
Experience: Taxes, Immigration, Labor Relations
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