Deductible meals?

[Foz]

Here's a tough one, Joe... deductible meals for the Schedule C, self-employed trader.

My employer (me) provides my meals to me at my place of employment (my house) for his convenience, as I need to stay near my computer during trading hours.

As I read it, these meals would be deductible on my Sch. C as an employee benefit program (line 14) but not taxable as earned income elsewhere in my 1040 because in Pub 15-B, p. 12 in the section "Meals on Your Business Premises" the value of meals can be excluded from wages if they meet the premises and convenience test.

What do you think? How would you suggest valuing these meals if I have commingled my personal and business lunchmeat? I could get a comparable lunch for $6 at Subway (sandwich, soda, & cookie).

 

[TipTopTrader]

Hi Foz:

This question really raises the issue whether a sole proprietor is deemed to be an employee of himself for fringe benefit purposes. A sole proprietor can be an employee for some purposes, but not for other purposes. The code section in question, Section 119, requires that the taxpayer be an "employee" before any of the meals for the convenience of the "employer" can be excluded.

As a general rule, partners, members of an LLC and shareholders owning more than 2% of an S corporation's stock are typically NOT considered to be employees for fringe benefit purposes. Based on that, I doubt that you can be an "employee" of yourself as a sole proprietor for purposes of "meals for the convenience of the employer," especially since you are not paying any S.E. tax if your income is derived from trading.

I did a quick preliminary search through the code, regs, the Bittker treatise, and BNA to see if I could find a quick reference to "meals for the convenience of the employer" in the context of a trader. I found nothing.

Given the IRS concern about self-employed people trying to convert personal expenses into deductible business expenses, I think deducting these meals would be a stretch as a sole proprietor. It would be an aggressive deduction if you were incorporated, but at as a sole proprietor I would not recommend it.

As before with your moving expenses, if I get a chance to do further research, I'll report my results. But the first pass does not look like this is a good idea in these circumstances. All these deductions are judged on a "facts and circumstances" test, and I think a tax court would be hesitant to approve the deduction--and the easiest way for such a court to rule would be to simply say you are not an "employee."

 

[riddle]

As it happens, there is an article in the January 04 edition of Active Trader by Robert Green about fringe benefit plans etc. I am not American, so don't really understand the difference between your various corporation types, and therefore won't try to come up with a yes/no answer, but it would probably be worth looking at.

Steve

 

[Foz]

Thanks, Joe. And thanks for the Active Trader reference, Steve.

The Active Trader article seems to be saying you could possibly deduct your spouse's meals if your spouse is an employee of your trading company, but you couldn't deduct your own (the owner's meals).

 

[traderstatus]

Coming in a little late on this one, but a solo-trader generally should be an employee of his c-corp to get a §119 meals allowance for a bullit-proof deduction. One might use a c-corp as a managing member/partner in his LLC and then as the employee of the managing member/partner would be required to have lunch on the premises. The law on this is:

Wilson v. Comr., 376 F.2d 280 (Ct. Cl. 1967), which held that a partner could not exclude under §119 meals and lodging furnished for the convenience of the employer, because the partnership could not be the employer of its partners.

Dilts v. U.S., 845 F. Supp. 1505 (D. Wyo. 1994) (Sole S corporation shareholder not considered an employee under §119).

But see Armstrong v. Phinney, 394 F.2d 661 (5th Cir. 1968), in which the Fifth Circuit suggested that a partner could be treated as an employee for purposes of §119.