A “working condition fringe benefit” is tax-free to your employees and deductible by your Maine-based company. To qualify for this tax-favored treatment, however, the expense must be “ordinary and reasonable” under the circumstances. In addition, if the benefit involves recreation, amusement or entertainment, the expense must be directly related to, or associated with, your small business.
Obviously, the IRS can, and does, question corporate entertainment deductions, but as one case shows, taxpayers taking these write-offs can prevail.
For 40 years, Townsend Industries conducted an annual two-day sales meeting at its headquarters. Following the meeting, the manufacturing company sponsored a fishing trip for all of its staff members at a resort lodge in Canada. Usually, about half of Townsend’s employees were in attendance. The activities at the lodge included fishing and golfing in groups. The company felt that by mixing up staff from different departments in this relaxed environment, various business discussions were initiated.
The IRS challenged the company’s deductions. They claimed the benefits to the employees represented taxable wages, and therefore, a portion of these wages should have been withheld for income tax, Social Security and Medicare taxes.
The case eventually wound up before the Eighth Circuit Court, which ruled that the cost did qualify as a working condition fringe benefit.
Reasons cited by the court
The employees viewed the excursions as a regular part of their business routine. “Although the trips were voluntary,” the court noted, “nearly all of the Townsend employees who testified felt an obligation to attend and some felt that it was part of their job.”
The outings were employees only. There were no children or spouses allowed. The court noted that this indicated the trips were not a paid vacation.
Specific business activities were included as part of the trips. The court noted that employees and salespeople were exposed to Townsend products, a new product was initiated and subsequently introduced, and current business practices were discussed at length. (Townsend Industries Inc., CA-8, No. 02-3756 9/15/03)
This decision should not be viewed as carte blanche to sponsor tax-advantaged recreational-type activities for employees. In fact, the court insisted the ruling does not mean that “in all cases in which a corporation sponsors hunting, fishing, or other trips to ‘luxury’ vacation spots, the sponsoring corporation can avoid including the per-employee cost of the trip in its employees’ wages merely by presenting testimony relating to business allegedly conducted during the sojourn.”
It’s recommended that you have a formal agenda for business discussions and record any significant developments if your company engages in business trips. Consult with Filler & Associates for more information.