Inquiry: We were wondering if the following were allowable:
1. Taking an established client to lunch
2. Taking a potential client to lunch
3. Lunches bought during training away from the office
Response: It Depends! There are several cost principles you must look at to determine if the specific type of expense is allowable or not. 5 key cost principles to review are,
1. 31.205-1 (Public relations and advertising costs;
2. 31.205-12 (Economic planning costs);
3. 31.205-18 (Bid and Proposal costs) and
4. 31.205-38 (Selling Costs).
5. 31.205-43 and also consider 31.205-43
As you can see it is not as Black and White as it first appears!
Under 31.205-38 Direct Selling is one of 5 broad selling categories. Under subsection 31.205-38 (b)(5), Direct selling efforts are described as those acts or actions to induce particular customers to purchase particular products or services of the contractor. Direct selling is characterized by person-to-person contact and includes such efforts as familiarizing a potential customer with the contractors products or services, conditions of sale, service capabilities, etc. It also includes negotiation, liaison between customer and contractor personnel, technical and consulting efforts, individual demonstrations, and any other efforts having as their purpose the application or adaptation of the contractors products or services for a particular customers use. It goes on to state that The cost of direct selling efforts is allowable. But please always remember the reasonableness principle.
Generally, for your questions I would consider the following -
1. - Taking and established client to lunch would most likely be unallowable, unless the circumstances meet the test as outlined under 31.205-38. It sounds more like an entertainment type expense. However, one must also look at the purpose of the meeting, and the reason for it being held during lunch compared to some other time. These are similar to IRS guidelines for allow ability of meals. What might I do? Unless the meeting could be proven to be a working meeting, held during lunch do to time constraints and other factors, along with the urgency of the meeting, I would consider it an unallowable New Business Development cost.
2. - Taking a potential client to lunch could fall under the same guideline as number 1. but also 31.205-1 comes into consideration. Is this really public relations or advertising? It is a fine line sometimes between allow ability and unallowability. It can depend on the auditor at the time and their interpretation. Some have interpreted 31.205-38, as indicated above to include lunch for potential clients. I have seen it allowed and disallowed depending on auditor and circumstances. It also depended on the supporting documentation. Read 31.205-38 closely to determine how you interpret it. How would I handle it? If the trip was not based on overnight stay on my part, I would disallow my lunch, and most likely put the lunch for the potential client in allowable New Business Development, subject to the Per Diem Limitation on meals for the location. And I would be prepared to stand behind my decision, if amounts are material, if questioned by an auditor.
3. Lunches bought during training away from the office would generally fall under 31.205-43. Under this principle, attendance at meetings, conventions, conferences, symposiums, or seminars are allowable subject to the limitations set forth under 31.205 43 (Trade, business, technical and professional activity costs). This would include the travel, hotel, and meals. All of these related costs would be classified under training and education. Now again, be careful! If the training is away from the office but local, rather than out of town, then the lunch generally would be unallowable. However, if it is mandatory, or part of the training that requires staying through lunch where technical details are discussed or a related guest speaker is present, and it applies to all attendees; Then if lunch is purchased and delivered or brought back to the meeting, it could be allowable. On the other hand, if lunch is on your own while still in town, then I would consider it unallowable. If the company is putting on the training in town but away from the office for some of its employees, you can see how the lunch could be allowable or unallowable based on how the meeting and related lunch is structure. What would I do? Allowable if out of town as Per Diem, Unallowable generally if away from the office in town but not an integral part of the training.
I hope this gives you a bit more insight on the subject. NOW YOU SEE - Few Questions are as straight forward as people tend to think.
To read more on similar topics, go to the Articles page and do a search with key words "Marketing" "Selling" "Meals and Entertainment". I have written several articles addressing similar topics.