Tax Tips Logo ImageISSUE

When employees go to a restaurant for a “business meeting”, how should that be handled?  How do you document that expense?  Is it taxable to those workers?

 

SITUATION

Denali Christian College (DCC) is a private college exempt under Internal Revenue Code section 501(c)(3) and 170(b)(1)(A)(ii).  They are required to file Form 990 annually.

DCC’s Controller is updating their finance and accounting policies and procedures.  This is a great way to begin the New Year!  He emails to ask us about employee business meetings.

“I am updating our business expense policy and have a question about employee meals. Knowing that we have to tax employees on fringe benefits unless there is a specific exclusion, I have been looking in vain for an exclusion for a group of employees who go out to a restaurant and discuss business (they have an identifiable business purpose and even an agenda, but they are NOT traveling or entertaining a business associate/client). Is there one?”

Hmmm.  We answer, “This is a great question and one we get frequently.  The various IRS publications are generally directed at for-profit businesses and refer to whether the expenditures are ‘deductible.’  Thus, we need to look at the ‘ministry business expenses’ concept and glean what the rules might be for our arena.

“The short answer is that we would consider the scenario below a ‘business meeting.’  It is imperative that documenting the I.R.C. 274 requirements (Who, What, When, Where, and How much) be part of your consistently applied procedures.  The What here is the all-important business purpose.

“IRS Publication 535 (on page 45) applies to ‘business meetings.’  It speaks of entertainment expenses but would appear to consider ‘meals’ as part of the deductible expenses.  Note it states, ‘…but the main purpose of the meeting must be your company’s business.’  (And, we would add, it must be well-documented.)

“IRS Publication 463 (on page 10) talks about ensuring that these business meetings are ordinary, necessary, and appropriate for your business.

“If meals are brought into your offices for these ministry business meetings, they may meet the criteria of I.R.C. 119(a) as being for the convenience of the employer.  Although this may be off-point (given the specifics of your question), the IRS can apply the ‘Kowalski test’ – where the exclusion only applies to employer-provided meals if the meals are necessary for the employee to properly perform his or her duties.”

“Finally, the IRS has determined in rulings and audit findings that regular meetings between the same employees may not be deductible.  It is not clear whether ‘regular’ might mean weekly, monthly, etc.  If meetings between the same group of employees are occurring frequently, either the business purpose documentation must be very robust, or you should require employees to pay for their own meals.”

 

RULES

From IRS Publication 463 (Page 10):

Other rules for meals and entertainment expenses. Any allowed expense must be ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your business. An expense doesn’t have to be required to be considered necessary. Expenses must not be lavish or extravagant. An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.

 

BOTTOM LINE

  • “Ministry business meetings” concern formal gathering of employees in which the purpose of the meeting must be your institution’s business.
  • Documentation is of utmost importance in establishing the business purpose of these meetings.
  • The IRS requires documenting the “Who, What, When, Where, and How Much” with regard to this type of meeting (see I.R.C. Section 274(d)).
  • Ensure that your institution’s procedures are clear and are consistently followed with respect to “ministry business meetings.”

 

Specific questions? Email Dave Moja

The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.

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