Federal Tax Alert – August 2017
Posted: August 11, 2017NHL Team Prevails in Tax Case: Away from Home Meals are 100 Percent Deductible
Summary
The Boston Bruins case represents a potential (but not guaranteed) opportunity for employers outside of the sports industry to deduct 100 percent for meals provided to their employees far away from the business premises.
In general, meals provided to employees on or near an employer’s premises can be 100 percent deductible by the employer (and not taxable to the employees) if the meals are provided for the convenience of the employer. However, companies are generally limited to a 50 percent deduction for the cost of employer-provided meals far away from the business premises. So why did the Tax Court hold, in Jacobs v. Commissioner, 148 TC No. 24 (June 26, 2017), that the Boston Bruins were able to fully deduct meals served in far-away-city hotels, where the hockey team stayed for on-the-road games, without applying the 50 percent deduction disallowance? Can this ruling similarly apply to companies outside of the sports industry?
Details
Background
The 2009 and 2010 returns for the S corporation owning the Boston Bruins (a National Hockey League team) claimed meal expense deductions of $255,754 and $284,446, respectively, for the full expenses incurred in providing meals to the hockey players and team personnel while at away-city hotels. The IRS determined deficiencies of $45,205 and $39,832 for the taxable years 2009 and 2010, respectively, asserting that the 50 percent disallowance deduction for meals under Section 274(n) of the Internal Revenue Code applied to the meal expenses provided to the traveling employees. The Bruins petitioned the Tax Court, disputing the IRS’ determination.
At issue is whether the hockey club satisfied the exception to the 50 percent disallowance deduction for meals and were able to deduct 100 percent of the cost it incurred to provide its players and staff with meals while traveling to away games. In finding in favor of the Bruins, the Tax Court concluded that the away-city hotels constituted the Bruins’ business premises. This ruling provides flexibility to the definition of an “employer-operated eating facility.”
Meeting the Exception to the 50% Deduction Limitation
Section 162(a) allows taxpayers to deduct business expenses.
Section 274(n) imposes a 50 percent limitation on the deduction for meal expenses, unless an exception applies.
Section 274(n)(2)(B) provides that the 50 percent limitation does not apply if a meal qualifies as a de minimis fringe benefit that is excludable from the employee’s gross income under Section 132(e).
Section 132(e)(2) addresses whether the operation of an eating facility by an employer qualifies as a de minimis fringe benefit. To meet this exception, each of the following six elements of Section 132(e) and its corresponding regulations must be satisfied.
- Access to the eating facility must be available in a nondiscriminatory manner.
- The eating facility is owned or leased by the employer.
- The eating facility is operated by the employer.
- The meals furnished at the facility are provided during, or immediately before or after, the employee’s workday.
- The meals are furnished for the convenience of the employer.
- The facility in which meals are furnished is located on or near the business premises of the employer.
BDO Insights
Although this precedent may readily apply to franchise teams within the sports industry, the flexible definition of an “employer-operated eating facility” adopted by the Tax Court may be sufficiently expansive to permit similarly situated companies to fully deduct meals away from their traditional employer facility. While elements (1) through (5) discussed above may be straight forward to satisfy, the sixth element may be more challenging for other companies to meet, depending on the nature of their business. For the remote location to constitute a company’s business premises in which the cost of employer-provided meals are fully deductible, an employer must establish that its employees perform a significant portion of their duties at that location or the employer conducts a significant portion of its business there.
For more information, please contact one of the following practice leaders:
Peter Klinger Partner |
Carl Toppin Managing Director |
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Joan Vines Managing Director |