This is a tough one, and a deep topic, so be sure you want to step into this before reading further. This is not a general tax topic, but one which is very industry-specific.
In 1987, IRS/Congress established the 50% non-deductibility for meals and entertainment. This was in response to political heat for the infamous "three-martini-lunch" being deductible when ordinary people couldn't deduct a baloney sandwich.
At the time, government contractors were (and still are) engaged in "cost-plus" contracts with the Dept of Defense, with razor-thin profit margins since the cost was indemnified. Contractors threatened to take the Dept of Defense to arbitration to recover the cost of losing the 50% deduction.
When the U.S. government found out the whole IRS scheme was going to cost them money, they banged on the Treasury Dept, and the IRS issued regs to allow 100% deductibility for "reimbursable" cost. There are hundreds of millions in such meals expense, most of it is claimed per diem.
In the commercial world, the regs were interpreted that "nested" reimbursements would cause the 50% disallowance to be applied only once, (i.e. either on the employee, a subcontractor, or a prime contractor, or end customer). IRS was seemingly happy with this, however, if the end customer is the U.S. government, the government is tax-exempt and IRS gets no benefit from the 50% rule.
I am hearing about new regulations (or possible court cases) where IRS is now disallowing 50% of M&E even if they are reimbursed. I am told informally that this started around 2005. Does anyone know anything about this, or if not, does anyone know how I can research and find out??
Thanks, Snag
In 1987, IRS/Congress established the 50% non-deductibility for meals and entertainment. This was in response to political heat for the infamous "three-martini-lunch" being deductible when ordinary people couldn't deduct a baloney sandwich.
At the time, government contractors were (and still are) engaged in "cost-plus" contracts with the Dept of Defense, with razor-thin profit margins since the cost was indemnified. Contractors threatened to take the Dept of Defense to arbitration to recover the cost of losing the 50% deduction.
When the U.S. government found out the whole IRS scheme was going to cost them money, they banged on the Treasury Dept, and the IRS issued regs to allow 100% deductibility for "reimbursable" cost. There are hundreds of millions in such meals expense, most of it is claimed per diem.
In the commercial world, the regs were interpreted that "nested" reimbursements would cause the 50% disallowance to be applied only once, (i.e. either on the employee, a subcontractor, or a prime contractor, or end customer). IRS was seemingly happy with this, however, if the end customer is the U.S. government, the government is tax-exempt and IRS gets no benefit from the 50% rule.
I am hearing about new regulations (or possible court cases) where IRS is now disallowing 50% of M&E even if they are reimbursed. I am told informally that this started around 2005. Does anyone know anything about this, or if not, does anyone know how I can research and find out??
Thanks, Snag
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