here is very good news for CPAs whose clients face the often burdensome administrative costs of claiming allowable expense deductions for meals and entertainment (M&E)—the IRS now will permit the use of statistical sampling to account for such expenses.
Although most M&E expenses are subject to a 50% limit, exceptions permit 100% deductibility. To facilitate accounting for fully deductible M&E, the IRS issued revenue procedure 2004-29, which establishes guidelines for using statistical sampling methods to account for these expenses, whether in an original return, under IRS examination, in litigation or when making a refund claim.
LIMITS ON DEDUCTIBILITY
IRC section 162 allows a deduction for all ordinary and necessary expenses paid or incurred during the tax year in carrying on a trade or business. Section 274(n)(1) generally limits the M&E deduction by 50%, but allows 100% deductions for costs
Treated as compensation (section 274(e)(2)).
Related to food and beverages excludible as de minimis fringe benefits (section 274(n)(2)(B)).
For events that involve a ticket (section 274(n)(2)(C)).
For taxable payments or reimbursements for moving expenses (section 274(n)(2)(D)).
For food or beverages that federal law requires to be provided to certain crew members (section 274(n)(2)(E)).
Revenue procedure 2004-29 not only permits the use of statistics, but also explains sampling standards. By using statistical sampling, a taxpayer can take deductions without incurring costs in excess of the related tax benefit.
SECTION 132 COORDINATION
Perhaps the most common 100% allowable M&E expense is the exception for de minimis fringe benefits. Although revenue procedure 2004-29 allows the use of statistical sampling, an analysis of such benefits cannot be accomplished solely through that method. To establish the amount of identified expenses excepted via the fringe benefit rule, a taxpayer has to determine the frequency with which it provides similar fringe benefits, on either an employee-measured basis or an employer-measured basis, as explained in regulations section 1.132-6(b). Thus, even after selecting a statistical sample, a taxpayer may have to review documentation from outside the sample and target population to identify similar fringe benefits included in employees’ gross incomes or excluded as a de minimis fringe benefit.
CPAs can find further guidance on applying statistical sampling in revenue procedure 2004-29’s appendices, which provide standards for uniform statistical studies. Appendix A covers sampling plan standards and lists methods and attributes to be used within a plan. Appendix B contains sampling documentation standards; Appendix C offers technical formulas.
For years the IRS disallowed statistical sampling methods to account for M&E. However, in revenue procedure 2004-29, it has set the standards to permit statistical sampling for determining these deductions.
For more information, see the Tax Clinic, edited by Frank O’Connell, in the September 2004 issue of The Tax Adviser.
—Lesli S. Laffie, editor
The Tax Adviser
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