USA Food at Networking Event 100% Deductible

[LynnBooker2024]

Hello,


I hosted a networking event at a restaurant for current and potential clients. Can I deduct the cost of the food at 100%? I own an S-Corp with no employees. I am not on payroll.


Thanks.

 

[DrStrangeLove]

I'm assuming that your S-corp held the event and not you personally, yes?

IRC 162(a) says, in part, "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business". If holding events like this are "ordinary and necessary" for your industry (you don't say what that is), then I think you have the start of a good argument that the food is deductible.

Now, IRC 274(k) limits this by saying:
"(1)In general: No deduction shall be allowed under this chapter for the expense of any food or beverages unless—
(A) such expense is not lavish or extravagant under the circumstances, and
(B) the taxpayer (or an employee of the taxpayer) is present at the furnishing of such food or beverages."
For the first prong of this test, are these meals closer to rubber chicken dinners, or are we talking Wagyu filet mignon and Chateauneuf-du-Pape? Since you're the S-corp's owner, and you're present at the meals, the second prong should be OK. As long as the meals aren't "lavish or extravagant under the circumstances", the S-corp will be able to deduct them.

As for the amount deductible, IRC 274(n)(1) says that the amount deductible is limited to 50% of the cost, and IRC 274(n)(2)(D) makes an exception for
"(i) for food or beverages provided by a restaurant, and
(ii) paid or incurred before January 1, 2023."
If these meals were provided in 2023 or after, I'd say your deductible amount is limited to 50% of the cost.

Are you inviting politicians in order to lobby them? Then IRC 162(e) would seem to apply and deny any deduction.

More importantly, when you say you're "not on the payroll", you own an S-corp. If you're doing any work on the S-corp's behalf, the S-corp still needs to pay you a reasonable wage/salary that reflects your contribution, something reasonably comparable to what the S-corp would pay an employee to do those same things. Not doing so will be a big red flag for an audit--it's a common abuse of S-corps to not pay an owner who does work for the S-corp anything. You really don't want to roll those dice.

So, 1.) deduct half the cost of the food; 2.) pay yourself for your work; and 3.) attach a Form 8275 or Form 8275-R to your S-corp's return with your argument if you disagree with deducting only half the food or with paying yourself a reasonable salary for your efforts. (The standard you need to meet is a reasonable basis standard, IIRC.)

 

[LynnBooker2024]

Hello DrStrangeLove. Thank you so much for your thorough answer. I appreciate you taking the time to provide this information. I apologize for not providing more information up front. I thought I had done so, but clearly I missed some important points.

• Yes, my S-corp held/paid for the event.
• Yes, this type of event is common in my industry
• No, the food and drinks were not lavish or extravagant.
• Even though this event took place this year, I spent over $5,000 for this event. I can only deduct 50%? Could this be considered marketing, which would be 100%? Just trying to understand how to accurately record this transaction.
• No politicians
• I transitioned my business from a SMLLC to an S-Corp this year, so I will pay myself a reasonable salary by the end of the year. I do appreciate you reminding me to do so.

 

[DrStrangeLove]

Recoding the permanent difference between your GAAP expense for the food and the tax-deductible portion would depend on how you have your ledger set up. A large corporation might have different ledger "stripes", one for Cash done on a cash basis, one called GAAP Adj to adjust the cash-basis ledger to get GAAP accrual-basis, and one called Tax Adj to adjust either cash-basis or GAAP accrual-basis to your tax basis. (That's almost certainly overkill for you; you can probably make do with a simple worksheet in Excel. There are a lot of ways of skinning that particular cat.)

If you don't have an account for this expense already, I'd suggest adding two accounts to your ledger's chart titled something like Expenses ---> Marketing ---> Events - Food - Deductible and Events - Food - Non-Deductible, and showing the two expenses as separate line items in your GAAP books. The 50% deductibility means you'll have a permanent difference between your book income and your taxable income, but that's normal. On Form 1120-S, Schedule M-1 reconciles your GAAP book income to your taxable income, and it asks you to itemize. That's where your non-deductible portion will go.

As for characterizing it as "marketing", this is a common thing people try to do. Entertainment expenses are another notorious area where people try to "recharacterize" a non-deductible expense into a fully deductible category. Think of it this way: Suppose you get audited. The auditor will ask for your receipts/documentation of your marketing expenses. And they'll see that part of the expense for this event was for food. That's all they need to adjust your business expenses while quoting IRC 274. And it will make it look like the auditor can't take you at your word.

You can deduct 50% of the *food*. The rest of the event expenses may be deductible, depending on what the money was spent on. (Entertainment? None of it, most likely. Swag like pens, keychains, and blocks of post-it notes? Fully, up to limits. Talk to your CPA for details.)