Meals can be 100% Deductable

Ten Forty + Quality Tax Preparation & Financial Services 281-397-7777 Fax 281-397-7443 Tax Tips Meals 100% Deductible A business deduction for meals and entertainment is generally limited to 50% of the expense [IRC §274(n)]. The 50% limitation applies to meal expenses incurred while trav- eling out-of-town on business, and to local meal expenses incurred while entertaining clients, customers, or employees. One exception to the 50% limitation rule is when the meals qualify as a de minimis fringe benefit [IRC §132(e)]. The taxpayer in this case was the owner of the Boston Bruins, a National Hockey League (NHL) franchise based in Boston, Massachusetts. NHL teams play half of their games in their hometown arena (home games), and the other half at arenas in different cities (away games). The NHL requires teams to arrive in the away city at least six hours before the start of an away game. The union agreement between the NHL, member teams, and the players of member teams, requires that an NHL team travel to an away city the day before game day if the flight to the away city is greater than 2½ hours. The Boston Bruins typically traveled to away games with the players, coaches, medical personnel, athletic trainers, equipment managers, communications personnel, travel lo- gistics managers, public relations and media personnel, and other employees. The team would contract with away city hotels to provide for sleeping accommodations and ban- quet or conference rooms where pregame meals and snacks were served. The hotels would prepare the pregame meals to meet the players’ specific nutritional guidelines to ensure optimal performance for the upcoming game. The food was made available to all traveling employees of the team. On the day before an away game, the traveling employees would take a charter flight to the away city and check into a hotel. There was an 11PM curfew for the players on the night before the game. Depending on how early the team arrived on the day before an away game, the players would use the time before curfew to eat a meal, rest, receive treatments from the training staff, or complete strength and conditioning workouts. On the morning of an evening away game, the players would attend a mandatory breakfast between 8AM and 10AM in the meal room provided by the hotel. The breakfast was also provided to the other traveling employees, but only the players were required to attend. Players could be fined or prevented from participating in games if they were late or ab- sent from this breakfast. During the breakfast, team business was conducted. Players met with coaches, either one- on-one or in small groups, to discuss strategy and review game film. Public relations staff attended the breakfast to meet with players concerning anticipated media inquiries, inter- views, or other public-facing issues.The players also met with staff employees at breakfast to obtain game tickets for family and friends. Coaches, trainers, and management also used the breakfast to meet amongst themselves and make roster adjustments because of illness, injury, strategy, or performance issues. Following breakfast, the players boarded a charter bus and traveled to the arena or practice facility to prepare for the upcoming game. In the afternoon, the players returned to the hotel for lunch between 12:15PM and 2:15PM. Like breakfast, it was made available to all traveling employees of the team, but it was mandatory for the players. Coaches used this lunch period to conduct more small group or one-on-one meetings with players. Public relations staff also used this time to meet with players to discuss media issues. After lunch, the players were given free time, which was usually used to rest before the game. Afternoon snacks were provided by the hotel between 3:15PM and 5:15PM. How- ever, attendance for snacks was not mandatory for the players. The schedule was altered if there was an afternoon away game. Breakfast and lunch was replaced by a brunch that took place between 8AM and 12:30PM, depending on the time of the afternoon game. The pregame brunch was also made available to all traveling em- ployees of the team, but was mandatory for players, and involved similar strategy sessions, film review, etc. In addition to lodging and meals and meetings, the team used the away city hotels for other team-related activities, such as physical therapy, massages, strength and condition- ing training. About 2½ hours before game time, the team boarded a charter bus and traveled to the arena. After the game, the players typically remained at the arena for about one hour to shower, change clothes, and meet with the media. They then traveled to the airport to fly back to Boston, or to the next away city. The taxpayer deducted 100% of the cost for pregame meals provided to the players and all of the traveling employees of the team while at away city hotels. The IRS claimed that the cost of these meals were subject to the 50% limitation. The IRS did not challenge the 100% deduction for meals that were provided by the team to players and staff at their home arena in Boston, Massachusetts. To meet the de minimis fringe benefit exception to the 50% limitation, IRC section 132(e) (2) requires that access to the eating facility is available on substantially the same terms to each member of a group of employees which is defined under a reasonable classifica- tion set up by the employer which does not discriminate in favor of highly-compensated employees. The taxpayer provided pregame meals to all of its traveling employees which included highly-compensated employees as well as nonhighly-compensated employees on substantially the same terms. Therefore, the court said the non-discrimination rules under that code section were satisfied. IRC section 132(e) also states that employee meals constitute a de minimis fringe if: 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 employee’s workday, and 5) The annual revenue derived from the facility normally equals or exceeds the direct operating costs of the facility (the revenue/operating cost test). The court examined each of the above tests to see if the taxpayer satisfied all five requirements. Eating facility is owned or leased by employer. The term lease is not defined in the regulations. Although the hotel contracts were not specifically identified as leases, the court said the substance of the contracts between the hockey team and the hotels were in essence a lease. The hockey team contracted with each away city hotel to occupy meal rooms and determined what types of food were to be served, the time, dates, and an- ticipated number of attendees. The team did not provide separate consideration for the rental of the meal rooms, however, the meal rooms were essential to the team’s away city business operations, and the hotels agreed to provide the meal rooms free of charge be- cause the team spent money for lodging and food. The team dictated aspects regarding the setup of the meal rooms, and required the hotel to keep the location of the meal room private from the general public. This indicates that the team contracted with away city hotels for the right to use and occupy meal rooms to conduct team business. Therefore, the agreements were substantively leases. Operated by the employer. The regulations for IRC section 132 state that if an employer contracts with another to operate an eating facility for its employees, the facility is con- sidered to be operated by the employer. The hockey team contracted with each away city hotel regarding the operation of the meal rooms as well as food preparation and service. The court said the arrangement indicated the team contracted with another to operate an eating facility for its employees. Business premises. An employer’s business premises is defined as a place where em- ployees perform a significant portion of duties or where the employer conducts a sig- nificant portion of its business. It is not necessary for an eating facility to be located in an employer’s principal structure for it to be considered on the business premises. Courts have ruled that rented hotel suites used for daily executive lunches constituted part of a company’s business premises. In this case, the court said the away city hotels were part of the hockey team’s business premises because of the significant business duties that were performed there along with the unique nature of professional hockey. The team was required to travel to various cities across the United States and Canada. The team was re- quired to travel to these cities the day before game day. Preparation for an away game was essential for the team’s success in the NHL, and the away city hotels provided necessary space for that preparation. The evidence suggests the away city hotels were essential for the team’s effective preparation, and thus were used by the team to conduct business. The court said it was not possible for the hockey team to conduct all of its necessary functions exclusively in Boston. The IRS argued that activities performed at away city hotels were insignificant because: 1) The activities at away city hotels are qualitatively less important than playing in the actual hockey game, and 2) The hockey team spends quantitatively less time at each away city hotel than they do at the team’s Boston facilities. The court said that although playing in a hockey game is more important to the taxpay- er’s business, the quality of play is directly related to the team’s preparation. Without the preparation performed at away city hotels, the performance of the hockey team would likely be adversely affected. The IRS provided no precedent to support the argument that a business premises must be the location where the most qualitatively significant busi- ness activity occurs, or where the most quantitative time must be spent at. Accordingly, the court said the away city hotels were a part of the hockey team’s business premises. Meals furnished during, before, or after employee’s workday. The IRS conceded that the taxpayer satisfied this requirement. Revenue/operating cost test. This test requires that revenue derived from the employ- er-operated eating facility equal or exceed the direct operating costs of the facility. The regulations state that an employer-operated eating facility satisfies this test if the em- ployer can reasonably determine that the meals are excludable from employee wages under IRC section 119. Meals are excludable from employee wages if: 1) They are furnished for the convenience of the employer, and 2) They are furnished on the business premises of the employer. The court already determined that the away city hotels were a part of the employer’s business premises. So the only remaining question was whether they were furnished for the convenience of the employer. The pregame meals were provided first and foremost for nutritional and performance reasons. The meals were selected to meet the exacting nutritional needs of professional athletes. The meals were also provided to meet the busy schedule of its employees. The meals were also provided during essential team preparation activities. The court was sat- isfied that there was credible evidence establishing the business reasons for furnishing pregame meals to its traveling employees. The court ruled 100% of the cost of pregame meals furnished to the taxpayer’s traveling employees was deductible as a de minimis fringe benefit under IRC section 132(e). Please call us if you have any questions. 2016 Tax Extension Deadlines are approaching. Go to www.tenfortyplus.com and complete your online organizer (under forms and documents). Make your appointment using our online appointment system. Call 281-397-7777 and get a user id with password set up so you can send us all your information through our online secure portal and do your taxes from the comfort of your home or office or come see us at our office. 1040 + Quality Tax Preparation & Financial Services Joseph C Becker EA www.tenfortyplus.com 281-397-7777, Fax 281-397-7443 joeb@tenfortyplus.com Contact Us There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following: • Pension or IRA distributions. • Retirement. • Significant change in income or • Notice from IRS or other deductions. 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