On M&E Deductions

In “The High Cost of a Free Lunch,” ( JofA, June00, page 61) the author says IRC section 274(n)(2) provides several exceptions to the 50% limitation on meals and entertainment expenses. Among the exceptions listed are “expenses directly related to the business meetings of employees, stockholders or directors.” I am unable to find this exception explicitly noted in section 274(n)(2).

Exceptions noted in 274(n)(2) refer to “(A) such expense…described in paragraph (2), (3), (4), (7), (8), or (9) of subsection (e).” Employee, stockholder, etc., business meetings are described in paragraph (5) of subsection (e) and are therefore not excepted. Likewise, the exceptions (B), (C), (D), and (E) of 274(n)(2) do not refer to employee, stockholder, etc., business meetings.

I think it is important that this be clarified.

Richard D. Cunningham, CPA
Seattle

Author’s reply: I have reviewed the issue and agree that the article erroneously described a second exception to the 50% tax limitation on deductible M&E expenses under IRC section 274(n)(2). M&E expenses directly related to the business meetings of employees, stockholders or directors should have been identified as an exception to the general tax law rule under section 274(a)(1). Specifically, such expenses under section 274(e)(5) are an exception to the general prohibition that “no deduction otherwise allowable under this chapter shall be allowed for any item” of entertainment, amusement or recreation. Such expenses should not have been listed as an exception to the 50% limitation under section 274(n)(2). Provided that such M&E expenses related to business meetings meet the IRC section 162 “ordinary and necessary” requirement, they will be 50% deductible, but not 100% deductible, because section 274(e)(5) is not listed as an exception to the section 274(n)(1) 50% limitation.

Earl B. Johnston, CPA
Chicago