Making Travel Less Taxing: Entertaining Clients

"Unfortunately, the IRS has specifically listed club dues and membership fees as not meeting either the directly related to or associated with tests, citing their purpose as being aimed at social rather than business pursuits. Apparently, the Service does not appreciate how seriously some frequent travelers take your lounge access. Country clubs, golf and athletic clubs, and airline and hotel clubs are among the list of nondeductible memberships."

This is only half right, I think.

1. While not deductible to a business, a business could provide a club membership to an employee and that airline lounge membership would not be a taxable fringe benefit.

2. A company can pay the annual fee for a business credit card, and if such card provides airline lounge access that access would not be a taxable fringe benefit.

So while an airline lounge membership itself might not be generally deductible, neither is it necessarily taxed.

Am I mistaken?

Gary -

I know of no prohibition against the employer deducting the annual fee of a business credit card provided to an employee, so I think that would be deductible to the employer and non-taxable to the employee.

Regarding your first question, I think it's a closer call.

The IRS publication on Taxable Fringe Benefits ( http://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf) on pages 69-70 points to club dues as a taxable fringe benefit citing IRC 274(a)(3).

Based on that publication and Code Section, I'd say that the airline club membership is taxable to the employee if paid by the employer. I suppose the taxpayer argument could be that an airline lounge is not an entertainment or recreational organization but is instead a business or professional organization, but I think that's tenuous.

Let me look at the Regulations of Code Section 274 to see if anything is more definitive.

Gary -

Here's an example from the Regulations on taxable fringe benefits that is also helpful in answering your question (and seems to be a more fuller explanation to the IRS's own publication I cited above). If the employee can demonstrate a business-use percentage for the membership, then that amount is a non-taxable fringe benefit. The amount allocable to personal-use, if reimbursed by the employer, will be taxable to the employee, though. Regardless of business-use by the employee, the club dues will be non-deductible to the employer as I mentioned.

Example 1. Assume that Company X provides Employee B with a country club membership for which it paid $20,000. B substantiates, within the meaning of paragraph (c) of this section, that the club was used 40 percent for business purposes. The business use of the club (40 percent) may be considered a working condition fringe benefit, notwithstanding that the employer's deduction for the dues allocable to the business use is disallowed by section 274(a)(3), if X does not treat the club membership as compensation under section 274(e)(2). Thus, B may exclude from gross income $8,000 (40 percent of the club dues, which reflects B's business use). X must report $12,000 as wages subject to withholding and payment of employment taxes (60 percent of the value of the club dues, which reflects B's personal use). B must include $12,000 in gross income. X may deduct as compensation the amount it paid for the club dues which reflects B's personal use provided the amount satisfies the other requirements for a salary or compensation deduction under section 162.

Treasury Regulation §1.132-5(s)(3).
http://www.taxalmanac.org/index.php/Treasury_Regulations,_Subchapter_A,_Sec._1.132-5

It's been 8 or 9 years since I looked at this but I recall reading either an IRS publication or private letter ruling discussing airline club memberships specifically and concluding that as long as the business use membership was provided to the employee and the expense not taken as a deduction by the employer that it would not be taxable to the employee. Haven't had time to search for this.

Gary -

Yes, as long as the use of the club by the employee is 100% for business-use, then what you have said in comment 4 comports with the example in the Regulations that I linked to in comment 3. I haven't seen a PLR on this specifically, but the Reg can be cited as authority whereas a PLR cannot, as you likely know.