Ref: Final Regulation Section 1.274-2

The IRS  just released final regulations dealing with reimbursed meals & entertainment in a business environment.  Here’s the changes in plain English:

Background: Most business meals and entertainment are only 50% deductible. However:

1. Employee submits to employer: When an employee submits meals to his/her employer, the reimbursement from the employer is not included in the employee’s income (if an accountable plan). The employee would then reduce his/her business meals/entertainment on Form 2106 by the full amount of the reimbursement.  Any amounts left over receive a 50% deduction on the employee’s return. Example: As an employee, you incur $4,000 in business meals with clients. You submit $3,500 to your employer for reimbursement, but forget to submit the other $500. Your meals deduction on your individual return would be $500 (and the IRS allows 50% = $250 as a deduction).

2. Independent contractor: IF the contract calls for the contractor to be reimbursed for meals and IF those meals are separately stated on the contractor invoice, then the contractor gets 100% deduction for the reimbursed meals.  The customer business would, therefore, get the 50% deduction.  Example: Software contractor is working away-from-home for 3 weeks and has $400 of meals which he can submit for reimbursement under the term of the contract. The customer pays him the $400 and includes it on the Form 1099. The contractor gets a deduction of $400 for the reimbursed meals. The customer’s deduction for that payment would be $400 * 50% = $200.

Please call or email with any questions and/or how to apply this final regulation to your business.

Reference: LB&I-4-0112-001

Internal Revenue Code Section 199 allows a special additional deduction for income derived from any lease, rental, license, sale, exchange or other disposition or qualifying production property manufactured, produced, grown, or extracted by the taxpayer in whole or significant part within the U.S.  This was expended to include qualified films or electricity produced by the taxpayer in the U.S.

Contracted Services: The IRS has now stressed that under Regulation 1.199-e(f)(1), the party qualifying for the deduction is the one where the “qualifying activity occurs.”  Thus, if ABX Corporation contracted with Abe’s Machine Shop to manufacture a product, Abe’s would get the domestic production activities deduction because it was Abe’s where the manufacturing occurred… even though it was ABX Corp who sold the finished product to the public.