Tax Question: Deductible meals when travelling

[samclem]

I do business as an independent consultant (pay documented on a 1099 Misc) and get paid/reimbursed by my client when I travel for lodging and meals (actual cost for lodging, meals at the govt rate). Ive been entering my meal expenses on Schedule C, Line 24b and entering 50% of the amount I was reimbursed. This is 50% deduction is consistent with the instructions for Schedule C and most of the info in Pub 463. It is also what the TaxCut instructions led me to do in the past. But, it seems that many of the people I work with (same situation) are deducting their meals at 100% as instructed by their tax preparers. I don't know what the rationale is, but perhaps it is the instructions in Chapter 2 of Pub 463 which state:

2 - Self-employed. If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if all of the following requirements are met.

• You have these expenses as an independent contractor.
• Your customer or client reimburses you or gives you an allowance for these expenses in connection with services you perform.
• You provide adequate records of these expenses to your customer or client. (See chapter 5.)

I meet the first two criteria. Regarding the last one--my client reimburses me at the allowed govt M&IE rate, and does have records of my locality (so they know the proper rate). I know none of the other guys I work with are submitting receipts--but they are still deducting at the 100% rate.

I also ran across a web site that indicates I should deduct these meals at 100%. June Walker says:

The regulation sounds this way in tax jargon: A nonemployee service provider (e.g., an independent contractor) that provides the required substantiation to and is reimbursed by the service-recipient for meal and entertainment expenses incurred on the latter's behalf isn't subject to the percentage reduction rule. The rule applies to the service-recipient, who can deduct only 50% of the reimbursement.

For those of you wanting to argue this with your tax pro: This is IRS Code Section 274(2)(A) and Notice 87-23.

Any answers or leads to where I can find an answer would be appreciated. The difference between 50% and 100% is about $1000 on my tax bill this year, which is a lot of beer and pizza.

 

[dex]

My understanding is that the 50% rule only applied when not traveling - e.g. working from the office you go out to lunch with the boss.

When traveling - not working out of the office - 100%

About no records note - you are the one that needs the records; not the employer in this case.

Receipts are only required if the amount of the per diem is higher than the government rate.
The higher than per diem less actual costs = taxable income.

check it out - I'm no expert; but I sound like one.

 

[samclem]

Dex,
Thanks. Inthis case, I think the rules are the same for meals consumed when traveling or meals/entertainment costs (even near home) directly connected with doing business.

From IRS Pub 463:

Rules for Independent Contractors and Clients

This section provides rules for independent contractors who incur expenses on behalf of a client or customer. . .


Accounting to Your Client




If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. You must keep adequate records of these expenses whether or not you account to your client for these expenses.
If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. See 50% Limit in chapter 2

Wouldn't it be great to have a simple tax system with rules that are clear? Right now my options are:
A) Read the "guidance" liberally, deduct the meals at 100%, save $1000 in taxes, and argue my position if I get audited. In the unlikely event of an audit, I'd have to pay the difference and maybe some interest/a small fine.
B) Read the "guidance" conservatively, deduct the meals at 50%, and pay $1000 more in taxes every year--maybe money I don't really owe. I'll be paying more than many of the folks I work with who have an identical situation and paid tax preparers who advised them to do things ths way.

Option A has little downside, is morally defensible, and saves me $1000 per year. Option B leaves me feeling like a patsy.

I wonder if my little situation, multiplied by scores of millions of taxpayers, explains why the government has a perceived "underpayment" of taxes due.

 

[Martha]

I would argue that your records are adequate for the employer and not claim the reimbursement as income. Did you read the referenced chapter 5?

 

[samclem]

I would argue that your records are adequate for the employer and not claim the reimbursement as income. Did you read the referenced chapter 5?

Martha,
Yes, I've spent some time analyzing Chapter 5. Here are some snippets that might pertain to my case:
My client reimburses me at the govt Meals and Incidental Expenses (M&IE) rate, and this section (below) implies this meets the "adequate accounting" standard. Problem: They use the term "employee", so I'm not sure it applies to me.

If your employer reimburses you for your expenses using a per diem or a car allowance, you can generally use the allowance as proof for the amount of your expenses. A per diem or car allowance satisfies the adequate accounting requirements for the amount of your expenses only if all of the following conditions apply.

• Your employer reasonably limits payments of your expenses to those that are ordinary and necessary in the conduct of the trade or business.
• The allowance is similar in form to and not more than the federal rate (defined later).
• You prove the time (dates), place, and business purpose of your expenses to your employer (as explained in Table 5-1) within a reasonable period of time.

If the IRS finds that an employer's travel allowance practices are not based on reasonably accurate estimates of travel costs (including recognition of cost differences in different areas for per diem amounts), you will not be considered to have accounted to your employer. In this case, you must be able to prove your expenses to the IRS.

The section below specifically applies to independent contractors. If the standard for "adequate accounting" is the same here as it is for employees (above), then I should be on solid ground with excluding the payments from income (which I think means I put them on Sched C, Line 26B at 100% of the govt M&IE rate I was paid). The section below indicates "adequate accounting" requires that I track "actual expenses", but I think it is reasonable (given the info in the section above) that "actual expenses" for airline tickets, lodging, gifts, etc must be tracked, but the government accepts the M&IE rate as "adequate accounting" for meals consumed while traveling.

Accounting to Your Client

If you received a reimbursement or an allowance for travel, entertainment, or gift expenses that you incurred on behalf of a client, you should provide an adequate accounting of these expenses to your client. If you do not account to your client for these expenses, you must include any reimbursements or allowances in income. You must keep adequate records of these expenses whether or not you account to your client for these expenses.
If you do not separately account for and seek reimbursement for meals and entertainment in connection with providing services for a client, you are subject to the 50% limit on those expenses. See 50% Limit in chapter 2.
Adequate accounting. As a self-employed person, you adequately account by reporting your actual expenses. (emphasis added by samclem) You should follow the recordkeeping rules in chapter 5.

For the record: I understand all information given on this board is not warranted or guaranteed or to be construed as legal/authoritative advice by those offering it--just general info.

 

[Martha]

Seems like you have a good argument. How about also posting the question to the Fairmark forum?

 

[samclem]

Seems like you have a good argument. How about also posting the question to the Fairmark forum?

Thanks--I knew folks had mentioned a specialized site for tax questions, but I couldn't recall it (or find it with a search). I'll do a search there and post a question if I can't find an answer.

I'm temped to just use the new touchstone for any tax question: "WWGD"? (What Would Geithner Do?). Whenever I ask myself this probing question, the vision of our Treasury Secretary comes to me and the answer becomes suddenly clear . . .

 

[samclem]

I've got a few replies over at Fairmark. There doesn't seem to be a consensus, but the most detailed answer supports the "take the 100% deduction" approach. As the government has made the guidance very murky and I can easily support my reasoning, I'm going to select the answer that leaves the most money in my pocket.

Martha et al, thanks for the assistance.