The IRS recently issued final regulations explaining the exception to the Section 274(n) 50-percent deduction limitation for certain expenditures paid or incurred under a reimbursement or other expense allowance arrangement. The final regulations are important for taxpayers that enter into reimbursement arrangements with their clients or customers for expenses that are subject to the 50-percent limitation of Section 274(n).
The regulations apply to any tax year beginning after August 1, 2013. However, in the preamble to the final regulations, the IRS states that taxpayers may rely on the rules for tax years beginning on or before August 1, 2013, for which the period of limitations under section 6511 has not expired.
With the final regulations being promulgated, taxpayers should use expense reimbursement arrangements containing provisions that make clear which party is to bear the expense and thus will be subject to the 50-percent limitation.