Full Deduction on Meal Reimbursements

nder IRC section 274(n), employers generally may deduct only half their reimbursements to employees for meals and entertainment. But employee-leaseback arrangements—notably in the trucking industry—have mapped a route through the section’s several exceptions.

Many smaller trucking carriers use a professional employer organization (PEO) to reduce their costs. One PEO, Transport Labor Contract/Leasing (TLC), in 2004 had 5,563 driver-employees leased to 453 trucking company clients. TLC paid per diem reimbursements to its drivers and billed its trucking company clients for these amounts. In 2004 the Tax Court said TLC was subject to the 50% limitation because it, rather than the trucking companies, was the “common-law employer.” Although the trucking companies made recommendations on which drivers to hire, the Tax Court noted that TLC screened and eliminated some candidates and retained the right to lease a driver to any of its trucking clients. TLC appealed to the Eighth Circuit.

Result. For the taxpayer. If the reimbursement is wages, the 50% limitation is on the employee, but the limit shifts to the employer for expense reimbursements. However, an employer can escape the limit if the payments qualify under the IRC section 274(e)(3) exception, because they are “paid or received by one person…under a reimbursement or other expense allowance arrangement with another person other than an employer.” The appeals court said TLC qualified for this exception because it was the employer performing services for a “person other than an employer” under a proper reimbursement arrangement.

The Eighth Circuit also said it did not disagree with the Tax Court’s decision in Beech Trucking, 118 T.C. 428 (2002), in which the Tax Court applied the limitation to a trucking company that was the common-law employer. But when a PEO is the employer, it should qualify for the exception if it can substantiate a “reimbursement or other expense allowance arrangement” as defined by 1.62-2(c) through (f) of the Treasury Regulations. The trucking company, not the PEO, actually bore the expense and thus should be subject to the limitation, the appeals court said.

If the PEO is the common-law employer, it can escape the limitation by qualifying for the section 274(e)(3) exception. And if the PEO is not the employer, it also should escape, because the limit will be applied to the trucking company, as in Beech. The only way for a trucking company to escape the limit under the Eighth Circuit’s approach is to argue that the PEO is the common-law employer and that the reimbursement arrangement or accounting does not qualify under the regulations.

Transport Labor Contract/Leasing Inc., 98 AFTR 2d 2006-6143.

Prepared by R. Dan Fesler, CPA (inactive), CIA, CMA, professor of accounting, and Larry Maples, CPA (inactive), Alumni Professor of Accounting, Tennessee Technological University, Cookeville, Tenn.