IRS issues important guidance on expense reimbursement arrangements

Washington National Tax Services

The IRS recently issued proposed regulations explaining the exception to the 50-percent deduction limitation of section 274(n) that applies with respect to certain expenditures paid or incurred under a reimbursement or other expense allowance arrangement. The rules in the proposed regulations (subject to any changes when finalized) can be very 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 proposed regulations are significant because they seek to provide certainty as to which party in a reimbursement arrangement will be subject to the 50-percent disallowance.

The regulations are proposed to apply to any tax year beginning on or after the date of publication of final regulations in the Federal Register. However, the IRS states that taxpayers may rely on the rules in the proposed regulations for tax years beginning before the publication of final regulations for which the period of limitations under section 6511 has not expired.

Going forward, in many cases it will be advisable that expense reimbursement arrangements contain provisions that make clear which party is to bear the expense, and thus will be subject to the 50-percent limitation.

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