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October 7, 2020

Final regulations clarify deduction disallowances for IRC Section 274 entertainment and food or beverage expenses

In final regulations (TD 9925), the Treasury Department and IRS clarified business expense deduction disallowances under IRC Section 274 for entertainment and food or beverage expenses after the Tax Cuts and Jobs Act (TCJA) eliminated the deduction for entertainment expenses.

The final regulations generally adopt the proposed regulations (REG-100814-19; see Tax Alert 2020-0442) issued in February 2020, with some changes made in response to public comments.

The final regulations apply to tax years beginning on or after publication (scheduled for October 9, 2020) in the Federal Register (2021 in the case of a calendar-year taxpayer).


IRC Section 274(a), as modified by the TCJA, disallows any otherwise allowed income tax deduction for an activity or facility that qualifies as entertainment, amusement or recreation. The TCJA repealed the exception from IRC Section 274(a) that preserved a deduction for business entertainment if directly related to or associated with the active conduct of business. This repeal effectively eliminated business entertainment deductions. Existing Treasury regulations define "entertainment" using an objective standard, including activity "of a type generally considered to constitute entertainment," such as "entertaining at night clubs, cocktail lounges, theaters, country clubs, golf and athletic clubs, [and] sporting events."

IRC Section 274(k) disallows a deduction for any food or beverages unless: (1) the expense is not lavish or extravagant under the circumstances and (2) the taxpayer (or employee of the taxpayer) is present at the furnishing of the food or beverages. IRC Section 274(n)(1) limits the deduction for any expense for food or beverages to no more than 50% of the expense that otherwise would be allowed. The TCJA repealed an exception to IRC Section 274(n) for de minimis fringe benefits, which includes employer-operated eating facilities.

In October 2018, the Treasury Department and the IRS published Notice 2018-76, with guidance clarifying when meal expenses are nondeductible entertainment expenses (see Tax Alert 2018-1997). In February 2020, the Treasury Department and the IRS published proposed regulations (REG-100814-19) that would add two new regulatory sections: Treas. Reg. Section 1.274-11, addressing disallowed deductions for entertainment, amusement or recreation expenditures paid or incurred after December 31, 2017; and Treas. Reg. Section 1.274-12, addressing the limitation on deductions for certain food or beverages expenses paid or incurred after December 31, 2017 (see Tax Alert 2020-0442).

Non-food entertainment expenses

Like the proposed regulations, the final regulations define entertainment for purposes of the statutory disallowance in a manner that largely tracks the existing definition, updated to remove outdated references.

The final regulations confirm that the IRC Section 274(e) exceptions continue to apply to entertainment expenditures, but do not provide rules addressing how those exceptions apply to those expenditures. The IRS said in the Preamble that taxpayers may "continue to rely upon the existing rules and examples in [Treas. Reg. Section] 1.274-2 to the extent they are not superseded by the TCJA or other legislation and are not inconsistent with the final regulations."

Food or beverage expenses


Like the proposed regulations, Treas. Reg. Section 1.274- 12(b)(2) defines "food or beverage expenses" to include the full cost of food or beverages, including any delivery fees, tips, and sales tax. In response to a commenter's question, the Preamble clarifies that indirect expenses, including the cost of transportation to a meal, are not included in the definition.

Treatment of certain business meals as 50% deductible

As in the proposed regulations, the final regulations treat food or beverages provided at an entertainment activity as nondeductible entertainment expenses unless the food or beverages are purchased separately from the entertainment, or the cost of the food or beverages is stated separately from the cost of the entertainment on bills, invoices, or receipts.

The final regulations follow the proposed regulations in requiring that the receipt amount reflect "the venue's usual selling cost for those items if they were to be purchased separately from the entertainment or must approximate the reasonable value of those items." If the food or beverages are not separately purchased or itemized, no allocation of the cost is permitted, and the full cost will then be a nondeductible entertainment expense. In addition, the Preamble clarifies that the "entertainment disallowance rule applies whether or not the expenditure for the activity is related to or associated with the active conduct of the taxpayer's trade or business."

The final regulations, like the proposed regulations, also incorporate other statutory requirements for deductibility under IRC Sections 162 and 274(k) by requiring (1) the expense not to be lavish or extravagant under the circumstances; (2) the taxpayer, or the taxpayer's employee, to be present at the furnishing of the food or beverages; and (3) the food or beverages to be provided to a business associate. For these purposes, both the proposed and final regulations, in Treas. Reg. Section 1.274-2(b)(3), define a "business associate" as a "person with whom the taxpayer could reasonably expect to engage or deal in the active conduct of the taxpayer's trade or business such as the taxpayer's customer, client, supplier, employee, agent, partner, or professional adviser, whether established or prospective." The Preamble acknowledges that this definition treats an employee as a business associate, effectively opening up the Notice 2018-76 non-entertainment treatment of meals (as 50% deductible) at entertainment events to employer-provided meals, including meals provided to both employees and non-employee business associates at the same event.

In response to a commenter's question about whether a sole proprietor can deduct the cost of meals when working throughout the day, the Preamble states that sole proprietors may deduct 50% of the food or beverage expenses under IRC Section 274(k) and (n) and Treas. Reg. Section 1.274-12(a) if they (1) meet the regulation's requirements, and (2) establish that the expenses are ordinary and necessary expenses under IRC Section 162(a) that are paid or incurred during the tax year in carrying on a trade or business.

Travel meals

The final regulations apply the general rules for meal expenses from Notice 2018-76 and the proposed regulations to meal expenditures incurred while travelling for business. These rules were not amended by the TCJA, but the final regulations clarify that these meals and other travel expenses are subject to IRC Section 274(d)'s heightened substantiation requirements, as well as the limitation on deductibility of travel expenses of spouses, dependents and other non-business companions, neither of which were modified by the TCJA.

Exceptions to deduction limitations

The final regulations restate that the deduction limitations do not apply to expenditures for business meals, travel meals, or other food or beverages that fall within certain IRC Section 274(e) exceptions that apply to IRC Section 274(n).

Expenses treated as compensation

IRC Section 274(e)(2) and (e)(9) provide exceptions from the deduction limitations for meal and entertainment expenses treated as compensation of an employee or other service provider. Existing regulations except amounts to the extent that the expenditure is treated as employee compensation on the taxpayer's originally-filed income tax return and as wages to an employee for purposes of withholding. For a non-employee service provider, the expense is excepted if includible in the worker's income as compensation or a prize, provided that the income is reported if required.

The proposed regulations would have denied the exception if the value included in income was less than the amount required to be included under the applicable valuation rules. A commentator said that denial because of an improper amount is unduly harsh because of the difficulty in determining the value of food or beverages and the possibility of good-faith errors.

The Treasury Department and the IRS agreed in the Preamble to the final regulations that this "all or nothing" approach "may lead to unduly harsh results." Therefore, the final rules allow the exception to apply — but in a more limited manner — if the taxpayer treats an improper amount as compensation. Under this more limited rule, the taxpayer is subject to a "dollar-for-dollar methodology." Under this methodology, the exception is capped at the dollar amount treated as compensation. The final regulations impose the dollar-for-dollar rule if (1) any portion of an item is excluded from income, or (2) less than the proper amount was treated as compensation.

The Preamble and an example add one further limitation. If no amount was treated as compensation, without regard to whether this treatment is proper or improper and without regard to whether this is due to an income exclusion or a reimbursement, the exception does not apply at all. Taken in combination, these rules cap or fully deny the exception unless some amount remains after applying any available income exclusions.

A commenter requested clarification that the exceptions under IRC Section 274(e)(2) and (9) apply to amounts a service provider pays the taxpayer for food or beverages (thereby reducing the amount taxable to the service provider). The final regulations provide that clarification via example but deny the exception for a reimbursement that fully eliminates the service provider's income (either on its own or in combination with an income exclusion). The Preamble notes that the taxpayer may then have an exception under IRC Section 274(e)(8), which applies to items that the taxpayer sells for adequate and full consideration, a topic that the final regulations decline to address.

Reimbursed expenses

IRC Section 274(e)(3) excepts food or beverage expenses incurred by one person for the performance of services for another person under a reimbursement or other expense allowance arrangement. This exception does not eliminate the 50% limitation but rather changes the taxpayer subject to the limitation depending on whether (1) the expense is substantiated to the ultimate payor or (2) the parties contractually agree upon the party to bear the limitation.

Under IRC Section 274(e)(3)(B), if the services are performed for a person other than an employer, such as by an independent contractor, the exception in IRC Section 274(e)(3) applies only if the taxpayer (such as the independent contractor) substantiates the expenses being reimbursed to that person. Like the proposed regulations, the final regulations state that the deduction limitations apply to an independent contractor unless, under a reimbursement or other expense allowance arrangement, the contractor accounts to its client or customer.

Recreational expenses for employees

IRC Section 274(e)(4) excepts the expenses of recreational, social or similar activities for employees, if provided in a manner that does not discriminate in favor of highly-compensated employees. This exception has previously been interpreted as limited to "usual" events, such as holiday parties, annual picnics or summer outings.

The final regulations adopt the proposed regulations' clarification that the exception does not apply to free food or beverages provided in a break room or to meals provided for the convenience of the employer.

Items available to the public

IRC Section 274(e)(7) excepts expenses for goods, services, and facilities made available by the taxpayer to the general public. This exception generally applies to items given away to the public. For employee meals, the final regulations allow this exception if similar food or beverages are made available to, and primarily consumed by, the public.

The final regulations restate the rules from the proposed regulations. Under the final regulations, "general public" includes, but is not limited to, customers, clients and visitors, but does not include employees, partners, 2% shareholders of S corporations, or independent contractors of the taxpayer. In addition, an exclusive list of guests also is not considered the general public. The final regulations also restate the rule that "primarily consumed" means greater than 50% of actual or reasonably estimated consumption. It remains unclear what is to be measured (for example, fair market value, gross receipts, allocable cost) or how consumption should be tracked. The examples do make clear, however, that a taxpayer hosting an open event at which food is served at no charge could fully deduct the cost of the food even if some of it is furnished to employees.

Goods or services sold to customers

IRC Section 274(e)(8) excepts expenses of goods or services sold by the taxpayer in a bona fide transaction for adequate and full consideration in money or money's worth. The final regulations clarify that money or money's worth does not include payment through services provided. This exception generally allows a taxpayer in the business of selling food to customers to fully deduct its costs. The final regulations confirm that a restaurant or catering business can fully deduct the costs for food or beverages, purchased in connection with preparing and providing meals to its paying customers, which are also consumed at the worksite by food service employees who work in the employer's restaurant or catering business.


The final regulations are likely to be well received by affected taxpayers. Both Notice 2018-76 and the proposed regulations were widely considered to be very generous, so taxpayers may be relieved that very few changes were made. While it would have been somewhat unusual for the final regulations to have been less generous than the proposed regulations, it is also unusual for commenters to recommend that the government take a less taxpayer-friendly approach to its rulemaking. In this case, however, the government's conclusion that meals are not entertainment expenses as long as the cost is separately stated was criticized by some commenters, who went so far as to question the government's legal authority to reach that conclusion. Taxpayers who were nervous that the government might reverse course can breathe a sigh of relief.

The limited changes that were made to the proposed regulations also were generally favorable to affected taxpayers. The changes to the exceptions under IRC Section 274(e) and (9) — abandoning the all-or-nothing approach and clarifying the effect of reimbursements by service providers — were particularly beneficial. However, taxpayers excluding any part of a meal's value from a service provider's income will still lose some or all benefit of the compensation exception under the final rule.

The Preamble emphasizes that the final regulations are limited to the disallowance of deductions under IRC Section 274 and do not provide any guidance on whether expenses would have been deductible in the first place. This point is important to bear in mind given the complexity of the final regulations, which in some places include exceptions to exceptions to the disallowance of deductions.

The final regulations were released approximately seven months after the proposed regulations were published in the Federal Register. Despite the quick turnaround, much has changed in those seven months. Many taxpayers have drastically cut their meal and entertainment expenses — all the way to zero in some cases — as a result of the COVID-19 pandemic. The adverse impact on businesses for which meals and entertainment are sources of revenue rather than expense has been significant, prompting some people to question whether the deductibility of meals and entertainment expenses should be expanded. Thus, the final regulations may not be the final word on these issues.


Contact Information
For additional information concerning this Alert, please contact:
Compensation and Benefits Group
   • Christa Bierma (
   • Stephen Lagarde (
   • Rachael Walker (
   • Bing Luke (
   • Andrew Leeds (
Workforce Tax Services - Employment Tax Advisory Services
   • Debera Salam (
   • Kristie Lowery (
   • Kenneth Hausser (
Accounting Periods, Methods & Credits
   • Angela Spencer-James (