20.24 Restrictive Test Exception for Reimbursements
As an employer, you can deduct expense allowances or other reimbursements of employee expenses that you treat as compensation and from which you withhold federal tax. You are not subject to the 50% deduction limit for meals and entertainment; the employee is, when claiming the meals on Form 2106.
A similar rule applies to meal allowances or reimbursements that you give to an independent contractor and that you report as compensation on Form 1099-MISC where the contractor does not adequately account for the expenses.
The restrictive tests (20.17) do not apply to such reimbursements. They are deductible if they are “ordinary and necessary” business expenses, and you have records to back up the deduction.
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