IRS allows statistical sampling for M&E costs: new procedure may increase taxpayer deductions.There is very good news for CPAs whose clients face the often burdensome administrative costs administrative costs, n.pl the overhead expenses incurred in the operation of a dental benefits program, excluding costs of dental services provided. of claiming allowable expense deductions for meals and entertainment (M&E)--the IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. now will permit the use of statistical sampling to account for such expenses. OVERVIEW 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 art original return, under IRS examination, in litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute. When a person begins a civil lawsuit, the person enters into a process called litigation. or when making a refund claim. LIMITS ON DEDUCTIBILITY IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel. 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 F&B is a common abbreviation in the United States and Commonwealth countries, including Hong Kong. F&B is typically the widely accepted abbreviation for "Food and Beverage," which is the sector/industry that specializes in the conceptualization, the making of, and delivery of foods. excludible as de minimis An abbreviated form of the Latin Maxim de minimis non curat lex, "the law cares not for small things." A legal doctrine by which a court refuses to consider trifling matters. fringe benefits fringe benefits, n.pl the benefits, other than wages or salary, provided by an employer for employees (e.g., health insurance, vacation time, disability income). (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 fringe benefit Any nonwage payment or benefit granted to employees by employers. Examples include pension plans, profit-sharing programs, vacation pay, and company-paid life, health, and unemployment insurance. 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. STANDARDS CPAs can find further guidance on applying statistical sampling in revenue procedure 2004-29's appendices ap·pen·di·ces n. A plural of appendix. , 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. SUMMARY 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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