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Meals and Entertainment Deduction Maximization

An analysis of your meals and entertainment (M&E) expenses can help ensure you are making the most of your business expense deductions. A company’s M&E expenses are generally limited to a 50 percent deduction, however, there are exceptions that allow a deduction of 100 percent. An evaluation of M&E expenses may reduce your taxable income.

The IRS now allows statistical sampling to determine adjustments to M&E expenses in Revenue Procedure 2011-42. Application of one of the approved sampling methods allows for a manageable, efficient process to determine the accurate deduction for multiple tax years. For example, we evaluated 400 records for a taxpayer from a total of 50,000 M&E expense items and extrapolated the results to the M&E total spending.

The Advanta M&E specialists have worked with Fortune 500 companies to determine the M&E deductions, provide the supporting documentation and recommend improvements to current policies to maximize deductions in future tax years. The IRS statisticians helped us develop our process so IRS examination teams have easily followed the results.

Steps to Analyze Meals & Entertainment Expenses

Phase 1

Advanta will analyze a download of your data, determine the types of documents you have available, calculate your sample size and may apply an estimated error rate. We will discuss the different types of M&E expenses, accounts and the application of your existing policies. We will provide a detailed estimate of your anticipated tax benefit and Advanta’s work plan. We have worked with the IRS to approve this work plan for companies currently under examination.

Phase 2

The first step is determining the sample and creating a roadmap that will allow the IRS to replicate the sample. Next, client staff provide detailed records (usually electronically) for the sample items. Advanta will review the sample and ask questions for clarification. Advanta then analyzes each transaction, determines the appropriate level of deductibility, and documents the reason supporting the classification of each item. This part of the study often involves the reclassification of many items to a higher level of deductibility.

Many companies also request advice to improve the classification of M&E expense items in order to streamline future tax reporting. We provide recommendations in our report along with the sample plan, extrapolation and calculations, transaction analysis and supporting documentation.

M&E Case Studies

  1. Accounting firm
    • Total M&E expenses for one year - $15,121,170
    • Client currently deducted 50% or $7,560,585
    • M&E study results in deductions of $9,731,375 or an increase of 28.7%.
  2. Manufacturer
    • Total M&E expenses for one year - $2,556,678.
    • Client currently deducted 50% or $1,278,339
    • M&E study results in deductions of $1,558,461, an increase of 22%.
  3. Co-op
    • Total M&E expenses for one year - $768,703
    • Client currently deducted 50% or $384,351
    • M&E study results in deductions of $494,639 or an increase of 15%.
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