De Minimis Entertainment - Where Does it Cross the Line?

Travel and entertainment, or T&E, is one of those accounting entries that sometimes takes on a life of its own. Drivers of company vehicles, particularly cars and SUVs/crossovers, are given those vehicles to sell, or service, the customers. And, part of that process is entertainment; spending time away from the office with customers and prospects.

Entertainment takes many forms; meals, sporting and cultural events, perhaps a drink at a bar. Most companies have some sort of policy governing entertainment; what is permitted, what isn’t, and examples of both. Two items are of most concern to companies: First, are expenses deductible under IRS rules? And, second, what level of entertainment (cost) is acceptable? It is the second question that will be addressed.

Entertaining Customers

Entertaining customers has been a key part of doing business for as long as business has been conducted. Buyers, for the most part, expect it (at various levels); sellers expect to have to do it to remain competitive. Regardless of the form it takes, entertainment helps build relationships, gets the customer away from the distractions of the office, and breaks down barriers to doing business.

That said, entertainment can, if uncontrolled, get out of hand not only in gross cost, but also if it is not tax deductible. For that reason, most companies have a written policy governing what is and isn’t acceptable.

There are those entertainment expenses that are the “norm” — to the extent there is a norm. Meals (taking a customer to lunch or dinner), going to a ball game, even a round of golf are seldom, if ever, questioned. The term de minimis is often used for such entertainment; those activities that are considered in the normal course of doing business.

Is there a point where the chosen entertainment crosses the line from de minimis to excessive, specifically as it pertains to the company entertainment policy? That, of course, depends upon what that policy is, what it defines (and what it doesn’t), and how that policy is applied.

Some companies have very detailed and specific travel and entertainment policies, while others are vague and/or simple. The IRS rules for the deductibility of entertainment expenses are vague, but hardly simple. Corporate policy that mirrors that vagueness allows for a bit of judgment on the part of management.

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Where is the Line?

As already noted, companies and the IRS have rules and policies that govern such entertainment to guide employees as to what is acceptable and deductible, and what is not. Where, then, does acceptable, de minimis entertainment become extravagant? If the company policy doesn’t provide the specifics, how are drivers to decide?

The answer lies, in part, within a quote from the late Supreme Court Justice Potter Stewart who, in his concurring opinion on a case involving adult entertainment, said of his lack of a specific definition, “…I know it when I see it.”

It doesn’t challenge credulity to say the same thing about the acceptance of entertainment expense and what is de minimis and what isn’t.
Corporate expense policies usually look something like this:

Reasonable entertainment expenses incurred by authorized personnel will be reimbursed.

It is required that receipts be attached for any one item costing more than $5. Details about the person(s) entertained must also be provided (e.g., their name, title, company, and business purpose of expense). Examples of these types of expenses include: golf green fees; theatre, concert, musical, sporting events, or other entertainment tickets; the cost of private boxes at sport facilities; room rentals to provide entertainment (e.g., hospitality suites); the cost of entertaining guests at night clubs, athletic, social, and sporting clubs; and on vacation and similar trips.

This language covers most of what a driver might need to know, such as examples of what is acceptable, what information will be needed when the expense is submitted, and that a receipt is required for any such expense exceeding $5, but it doesn’t cover it all.

The single best attribute that drivers, and their managers, can have is common sense. Here are two scenarios:

A driver is scheduled to meet with a small, but long-time customer. They meet one afternoon to go over the account, and the driver offers to take the customer to lunch. They go to the most exclusive restaurant in the city. Lunch, including drinks and a bottle of wine, costs $150.

Think about the same scenario; but this time the customer is new and will probably end the year as the largest customer in the driver’s territory.
It is likely, given the vagueness of the IRS rules, that both of the above would be deductible for tax purposes. But, of the two, the latter would also likely be more acceptable to management. It is the circumstances — one small, one very large customer — that separate the two.

Common sense should tell the driver that the more business generated by the customer, the more that can, and perhaps should, be spent on entertainment, reserving de minimis for smaller ones; however, unless the entertainment expense is beyond the pale — buying a car or paying the customer’s mortgage — most of what is considered entertainment is deductible as long as it meets the IRS criteria.

Tax vs. Policy

Ultimately, the question is, what does the company policy on entertainment consider de minimis? Not whether the expense is deductible for tax purposes. What are the gray areas? Some of them aren’t necessarily enumerated in policy, but are more a matter of common sense.

Others can be contained in a reasonable entertainment policy:

Cash gifts: Most companies don’t permit giving gifts of cash to customers. Not only does it border on being vulgar, but it might well upset the customer and push the limits of tax deductibility.

Documented quid pro quo: This is, or can be, a very gray area. Whatever the entertainment, providing it in specific return for a customer’s business should be prohibited, and is very likely prohibited by the customer’s company as well. But, it can be tacit, and thus a gray area.

Travel: Offering to provide travel to an event or function held by your company shouldn’t be a problem, but providing an all-expense paid vacation for the customer and his or her spouse probably is.

Gifts: Most companies provide token de minimis gifts for attendees at a company function, or for the holidays. Taking a customer to a local car dealer and buying him a car goes well beyond the pale. Many companies establish a price limit — $50 to $100 for gifts.

Events: Taking a customer to a ball game, or a Broadway show, is usually acceptable. Some companies buy season tickets, or even a suite, at a ballpark and regularly invite customers.

These are just some examples of the kinds of entertainment that can go beyond de minimis, and into the realm of actual bribery. Fleet managers owe it to their companies, as well as to their customers, to use common sense when entertaining.

Make certain drivers provide an accounting for the expense, a report as to what business was discussed, and avoid any and all situations that might be considered unethical.